The Returns to Power: A Political Theory of Economic Inequality 0197685951, 9780197685952

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The Returns to Power

 

 

The Returns to Power A Political Theory of Economic Inequality

T H O M A S F. R E M I N G TO N

 

Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trade mark of Oxford University Press in the UK and certain other countries. Published in the United States of America by Oxford University Press 198 Madison Avenue, New York, NY 10016, United States of America. © Oxford University Press 2023 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by license, or under terms agreed with the appropriate reproduction rights organization. Inquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above. You must not circulate this work in any other form and you must impose this same condition on any acquirer. Library of Congress Cataloging-in-Publication Data Names: Remington, Thomas F., 1948– author. Title: The returns to power : a political theory of economic inequality / Thomas F. Remington. Description: 1 Edition. | New York, NY : Oxford University Press, [2023] | Includes bibliographical references and index. Identifiers: LCCN 2022060546 (print) | LCCN 2022060547 (ebook) | ISBN 9780197685969 (paperback) | ISBN 9780197685952 (hardback) | ISBN 9780197685976 (epub) Subjects: LCSH: Income distribution—United States. | Equality—United States. | Equality—Russia (Federation) | Equality—China. | United States—Economic policy—21 century. | Russia (Federation)—Economic policy—21st century. | China—Economic policy—21 century. | Power (Social sciences)—Case studies. Classification: LCC H C 11 0 . I 5 R 46 2023 (print) | LCC H C 1 1 0 . I 5 (ebook) | DDC 339.2/2/0973—dc23/eng/20230202 LC record available at https://lccn.loc.gov/2022060546 LC ebook record available at https://lccn.loc.gov/2022060547 DOI: 10.1093/​oso/​9780197685952.001.0001 Paperback printed by Sheridan Books, Inc., United States of America Hardback printed by Bridgeport National Bindery, Inc., United States of America

 

CONTENTS

Acknowledgments  ix

1. The Threat to Democracy 

1

2. Growing Apart: Trends in the Distribution of Income and Wealth  2.1. THE INTERPLAY OF POLITICS AND ECONOMICS  13 2.2. GRASPING INEQUALITY  17 2.3. DENYING, DEFENDING, AND DEFLECTING INEQUALITY  22 2.4. MEASURING INEQUALITY  34

2.4.1. The Gini Coefficient  34 2.4.2. Incomes at the Top  37 2.5. HIDDEN INCOMES  48 2.6. SPATIAL INEQUALITY  50

3. The Theory of Economic Rents 

57

3.1. DEFINING RENTS  57 3.2. THOUGHT EXPERIMENTS  63 3.3. LIBERAL THEORY AND ECONOMIC RENTS  65 3.4. THE DEMISE OF ANTITRUST  71 3.5. BRINGING IN POLITICS  74 3.6. MEASURING THE SCALE OF RENTS IN THE ECONOMY  76 3.7. CONCLUSION  83

4. Rents and Market Reform 

85

4.1. DEREGULATION, COMPETITION, AND CONCENTRATION  86 4.2. TAX CUTS  93

v

13

 

vi C o n t e n t s

4.3. RELAXATION OF ANTITRUST ENFORCEMENT  101 4.4. LABOR RIGHTS  103 4.5. PRIVATIZATION OF SOCIAL PROTECTION  106 4.6. MARKET POWER IN HEALTHCARE  110 4.7. CONCLUSION  117

5. The Union of Wealth and Power 

119

5.1. DEMOCRACY AND POLITICAL EQUALITY  119

5.1.1. Early Winners  121 5.1.2. The Ascendancy of Corporate Power in the United States  5.1.3. The Rights of Corporations  131 5.2. PRIVATIZATION OF PUBLIC GOODS  140

5.2.1. Education  141 5.2.2. The News Industry  144 5.2.3. Criminal Justice  148 5.3. CONCLUSION: LABELING THE UNION OF WEALTH AND POWER  153

6. Financialization, Rents, and Inequality 

159

6.1. FINANCE AND RENTS  159 6.2. FINANCIALIZATION  165 6.3. PRIVATIZING PROFITS, SOCIALIZING RISK  172 6.4. POLITICAL INFLUENCE  177 6.5. FINANCE AND INEQUALITY  181 6.6. CONCLUSIONS  185

7. Autocracy and Oligarchy in Russia 

187

7.1. THE POLITICAL ECONOMY OF THE PUTIN REGIME  187 7.2. ECONOMIC TRANSITION IN RUSSIA  191



7.2.1. Shock Therapy  193 7.2.2. Privatization  197 7.2.3. Voucher Privatization  199 7.2.4. Formation of the Alliance of Wealth and Power 

7.3. PUTIN AND THE NEW RULES OF THE GAME  203 7.4. COMPETITION, CONCENTRATION, AND RENTS  207 7.5. RETURN TO THE MOBILIZATION REGIME  214

201

125

 



Contents

vii

8. Market Transition and Inequality in China 

220

8.1. RENTS AND THE DUAL ECONOMY  220

8.1.1. Liberalization  220 8.1.2. Cronyism, Localism, and Corruption 

224

8.2. MARKET POWER AND INEQUALITY IN CHINA  229 8.3. INCOME GROWTH AND INEQUALITY  232 8.4. SPATIAL INEQUALITY  233 8.5. GOVERNMENT POLICY RESPONSES TO INEQUALITY  238 8.6. STRANGLED DEMOCRATIZATION  244

9. The Social Market Economy in Germany 

249

9.1. PROSPERITY FOR ALL?  250 9.2. THE SOCIAL MARKET ECONOMY PARADIGM  255 9.3. THE ORDOLIBERAL CONTRIBUTION  259 9.4. LUDWIG ERHARD AND THE “ECONOMIC MIRACLE”  264 9.5. EVOLUTION OF SOCIAL POLICY  271 9.6. UNIFICATION  276 9.7. HOW STABLE IS THE GERMAN SYSTEM?  279 9.8. RECKONING WITH HISTORY  290

10. Necessary Opportunities 

294

10.1. THE CHALLENGE OF POLITICAL EQUALITY  294 10.2. IDEOLOGIES AND COLLECTIVE SELF-​INTEREST  298 10.3. POLARIZATION AND EXTREMISM  303

10.3.1. Geographic Sorting  304 10.3.2. Sociopolitical Sorting  308 10.4. NECESSARY OPPORTUNITIES  315

Notes  325 Index  413

 

 

ACKNOWLEDGMENTS

In writing this book I have benefited from discussions with many colleagues, presentations at conferences, comments from colleagues who generously took the time to read portions of the manuscript, and valuable research assistance by students. Colleagues and friends with whom I have discussed the ideas developed here include Marius Busemeyer, Rick Doner, Tim Frye, Peter Hall, Jiwei Qian, John Reuter, Tom Ricks, Nick Short, Terry Sicular, David Szakonyi, Bill Tompson, Andrei Yakovlev, and Po Yang. Charles Freifeld helped me understand the math behind the Pareto power law distribution. John Weche generously gave me time and insight as I worked in the library of the Monopolkommission in Bonn, Germany. Discussion at workshops of the International Center for the Study of Institutions and Development at the Higher School of Economics in Moscow was extremely useful, as have been presentations at Humboldt University, the University of Bremen, Beijing University, Jilin University, the Aleksanteri Institute of the University of Helsinki, the Higher School of Economics branch in St. Petersburg, Russia, the Moscow State Institute for International Relations, the Gaidar Forum at RANEPA in Moscow, the University of Konstanz, and the Advanced Leadership Initiative of the Kennedy School at Harvard University. I have benefited considerably from participating in the Seminar on the State and Capitalism at Harvard organized by Peter Hall and Kathleen Thelen. Bill Tompson, Rick Doner, Jon Rieder, Catherine Ross, and Tim Frye gave me searching and invaluable comments on earlier versions of the manuscript. Jon Rieder offered incisive ideas on improving the book’s organization. The two reviewers for Oxford University Press made searching, thoughtful, and constructive suggestions on the manuscript, which have improved the book considerably. Throughout, I am grateful to the editor, David McBride, for his support for the project. Teaching the seminar on the politics of economic inequality has allowed me to think through the evidence and ideas presented in this book, seeing them ix

 

x A c k n o w l e d

gments

more clearly as I worked to present them to students. Their questions have often helped stimulate and guide me. Two students who wrote their senior theses after taking the seminar taught me a great deal more about particular aspects of the subject. To Derek Xiao and John Beadle, therefore, I am especially grateful. I am indebted to a number of Emory and Harvard students for valuable research assistance along the way: Michel Li, Allison Cuttner, Zhiye Yang, Alexander Green, Tim Cammarata, Ben Topa, Henry Atkins, and Ara Omotowa. My wife, Nancy, has put up with this project not only with patience but also with steady support and wise suggestions, raising shrewd questions and offering judicious advice. Kathleen Montgomery went over the manuscript with a critical but sympathetic eye as an editor, and has provided wise suggestions and encouragement. Her detailed and insightful comments on matters great and small have improved the book immeasurably. My son, Alexander Remington, has helped me envision the project since its inception, has tirelessly read numerous iterations, and has made crucial and unsparing comments. His steady support and his keen judgment have improved the enormously. To him, with gratitude, admiration, and hope, I dedicate this book.

 

1

The Threat to Democracy

If we had polled historians in 1945 and asked them to predict which country, Germany or the United States, was more likely to suffer a violent attack on democracy mounted by the Far Right 70 years hence, probably few would have picked the United States. Yet it is in Washington, DC, where, on January 6, 2021, a band of far-​right militants incited by the president and elected leaders of the president’s party invaded the Capitol Building in order to block the certification of a free and fair presidential election. This shocking surge of authoritarian sentiment only grew stronger after Joe Biden took office as president. Over the months following January, more and more Republicans fell in with the lie that the election was illegitimate. By September 2021, almost 80% of Republicans believed Biden had lost the election.1 In response to their electoral loss, Republican governors and legislators in nearly every state introduced legislation to restrict voting access in ways that particularly disadvantage Democratic—​especially Black—​voters.2 Many of the bills and court cases aim to let Republican-​controlled state legislatures name slates of presidential electors regardless of the outcome of the election. The effort is well funded by wealthy conservatives whose avowed goal is nothing less than to “right the wrongs of November.”3 According to federal law enforcement agencies, violent right-​wing extremism has become the most serious terrorist threat facing the country.4 Well before the election, more and more people had been expressing deep concern about the country’s direction. By July 2022, 88% of the respondents in Gallup’s “right track /​wrong track” polls (asking whether people are satisfied with the way things are going in the country at this time) said the country is going in the wrong direction.5 But the reasons they give are diverging further and further. On the left, outrage over high inequality, institutional racism, and cronyism in government have fueled several movements—​Occupy Wall Street, Black Lives Matter, the Sanders campaigns in 2016 and 2020, and many more. On the right, toxic conspiracy theories proliferate, among them fears of the The Returns to Power. Thomas F. Remington, Oxford University Press. © Oxford University Press 2023. DOI: 10.1093/​oso/​9780197685952.003.0001

 

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The Returns to Power

“replacement” of Whites by Blacks and immigrants, pedophile cabals by highly placed Democrats, the suppression of “true” election results in 2020. Nothing illustrates our polarization more acutely than the Covid-​19 pandemic. Well into the pandemic, sizable segments of the public denied the reality of Covid; refused to wear masks or even to allow city governments and schools to require masking; resisted vaccinations; and accused the country’s public health establishment of taking away their freedoms. Many-​–​including President Trump—​touted quack treatments. The Trump administration refused to deploy a national policy for testing, contact tracing, and supplying essential equipment to fight the Covid-​19 pandemic.6 Some judges Trump appointed to the federal bench actively impeded federal and state efforts to enact masking mandates. For example, in April 2022, a Trump-​appointed judge struck down a Centers for Disease Control and Prevention (CDC) mandate.7 The Trump administration dropped two to three million people from health insurance coverage and politicized bodies such as the CDC and the Food and Drug Administration. Trump’s policies resulted in some 188,000 deaths in 2020 alone, according to calculations by a team of public health specialists based on what the US mortality rate would have been had the US death rates been equivalent to those of Canada, France, Germany, Italy, Japan, and the UK.8 More than any other single recent event, the pandemic crisis has exposed the consequences of economic inequality for society and government.9 It both exacerbated and was exacerbated by inequalities in nearly every single dimension of social life—​income, race and ethnicity; age; urban or rural residence; how we work and where we live; and whether we reside in a nursing home or prison or a single-​family detached dwelling. The pandemic’s impact affected us very differently depending on our income, race and ethnicity; age; urban or rural residence; how we work and where we live; whether we reside in a nursing home or prison or a single-​family detached dwelling. Black, Hispanic, and indigenous people died at twice the rate of Whites. By the end of December 2020, 1 in 1,625 Whites had been killed by the virus, but 1 in 875 Blacks had been. The death rate of people in the 75-​to 84-​year-​old age group was 200 times that of 18-​to 29-​year-​olds.10 Also among the pandemic’s effects has been a rapid, unprecedented accumulation of top-​end wealth. The number of billionaires in the world has quintupled over the past 20 years, but the jump in 2020 was the largest single increase in any year since Forbes began tracking billionaires’ wealth.11 In one year the number of billionaires on Forbes’ global list grew from 2,095 to 2,755. Their total net worth rose more than $5 trillion, or 61%.12 The growth of top-​end wealth was concentrated most heavily in a few countries, among them the United States. The United States and China saw the largest increase in the number of billionaires, but as a percentage of GDP, Russia saw the largest increase in billionaires’ total

 



The Threat to Democ rac y

3

wealth: it rose in one year by over 10 percentage points, from about 23% to about 35% of GDP.13 In China, their wealth share doubled from about 7% to about 15%.14 In countries where inequality was high, Covid drove it still higher. This book ties economic inequality to the problems of democratic erosion, polarization, and extremism. It represents a synthesis of much of the current research in economics and political science. It makes the case that the high and rising level of income and wealth inequality of the past 40 years is subverting democracy, and that the current wave of rising inequality flows directly from the turn toward market deregulation and liberalization that began in the late 1970s and accelerated in the 1980s. It takes an unconventional approach by comparing the United States with Russia, China, and Germany in order to shed light on the political forces that shape the institutional environment in which markets for labor and capital operate. Russia and China underwent major changes in their economies following the adoption of market reforms in the 1970s and 1980s. The United States also adopted sweeping reforms starting in the late 1970s directed at eliminating regulatory controls and liberalizing economic activity. The reforms in the United States were less sweeping, of course. Nonetheless, the paradigm shift in the United States led to a strikingly similar rise in economic inequality and for a fundamentally similar reason: the marriage of powerful corporate interests with government. As a contrast, I consider the case of Germany, both in the post–​World War II era and then again following unification. Germany after World War II, and the former East Germany after unification, saw fundamental reform away from a centrally planned economy toward a market-​oriented one—​but without a corresponding growth of income inequality. In Germany, although market forces have also produced a tendency for income gains to accrue at the top, top-​end income distribution, both before and after taxes, is not as concentrated as in the United States, Russia, and China. Nor are incomes at the low end so low. Likewise Germany’s level of wealth inequality—​while among the higher levels in Europe—​is well below that of the United States.15 As influential as Germany’s big corporations are, they do not possess the same concentration of political power as in the United States or Russia because their power is balanced by labor and other centers of countervailing power. The data show that although the tendencies for market income growth to be concentrated at the top are found in many countries, they are especially pronounced in the United States, Russia, and China. The United States stands out as well for the stagnation of bottom-​end incomes. And the United States, Russia, and China have extremely high levels of inequality of post-​tax-​and-​transfer incomes as well. The German case tells us that market openings do not have to lead to inequality of such magnitude. The point of this comparison is to make the argument that the high concentration of economic and political power in the United States requires that we

 

4

The Returns to Power

seek an explanation other than the conventional explanations of technological change and globalization. These are found throughout the capitalist world, after all, but democracy has not deteriorated in all capitalist democracies to the extent it has in the United States. This suggests that the extreme level of inequality in the United States has political sources as well as economic ones. Although dictatorship in Russia and China has grown more extreme and aggressive than in the United States, both nonetheless point to the dangers high inequality poses. The case of Germany illustrates the point that economic liberalization does not have to result in an antidemocratic oligarchy. Germany shows that liberal market economy is compatible with a liberal democracy, but also that to sustain one requires a collective choice by society. Germany may yet succumb to extreme inequality and democratic collapse, but it has successfully resisted both outcomes so far. We know that rising inequality is related to several trends—​globalization, technological change, a conservative ascendancy—​but it is hard to make any definitive claims about how these trends are related. What is cause and what is effect? Some studies of inequality show that multiple changes in the economy, society, and politics go together, but they are not able to distinguish those forces that are causally prior from those that are outcomes. Many trends have coincided: the concentration of incomes at the top and stagnation of incomes for the rest of society; the decline in the power of labor; tax cuts at the upper end; technological change and globalization; and the growth of the financial sector as a source of profits and incomes.16 Establishing causality is much harder. That is why the comparative approach is essential. When Russia and China launched their market reforms, many observers, both inside and outside each country, also expected that economic liberalization would eventually lead to a democratic political transition as economic growth expanded the middle class and built pressure for political representation and the rule of law.17 Some specialists saw regime transition in the Soviet bloc as part of the “third wave” of democratization, although scholars such as Samuel Huntington, who coined the term, warned of the strong likelihood of backsliding from the early democratic opening.18 For countries where income per capita had reached the $6,000 mark, research found that no democratic regime had failed.19 For economic determinists, prosperity from market reform would create conditions conducive to a democratic transition. In both Russia and China, liberalization stimulated economic growth (in Russia, growth only resumed at the end of the 1990s; the economy contracted sharply immediately following the transition). Economic growth, however, produced faster gains in income and wealth at the top of the income distribution than in the middle. In China far more than in Russia, the incomes of large strata of the population rose. Both economies, however, have allowed those who are

 



The Threat to Democ rac y

5

best positioned to take advantage of the market opening to become enormously wealthy thanks to their connections to the rulers. The same has been true in many other postcommunist societies. However, expectations that market-​led economic growth would result in democratization have been dashed. In terms of average incomes, both countries have crossed the $6,000 threshold: Russia’s per capita income is around $8,600, China’s around $7,700, but the tentative steps toward democracy in both have been thoroughly suppressed. (For comparison, the United States’ per capita income is around $53,500, although the richest 1% of households receive 20% of the income and own 35% of the wealth.)20 More important for the political consequences of growth than mean income levels is how income is distributed.21 High inequality is incompatible with stable democracy—​no less in the United States than in Russia or China. In both Russia and China, the initial postliberalization impulses toward political democratization have been stifled. Russia’s tenuous constitutional reforms of the 1990s, which allowed a fair amount of free political contestation, have been progressively gutted under Vladimir Putin and replaced with a fully authoritarian regime. In China, proposals for some limited democratic reforms in the 1980s were firmly suppressed with the Tiananmen massacre in 1989, which put an end to any official support for democratic institutions. Russia and China offer an extreme example of the harm that high inequality of economic resources can do to democratic principles, as those holding power forge a self-​sustaining alliance with those controlling wealth. Democratic contestation poses a clear threat of redistribution to both the political and the material advantages of the powerful. In Germany, after the collapse of the Nazi dictatorship and the country’s surrender in 1945, Germany underwent a vast paradigm shift toward economic liberalization and political democratization. The transition bore significant similarities to the reconstruction of the state socialist economies of the communist world. But in Germany, over time, economic liberalization has reinforced democratization in the political sphere rather than undermining it. Economic growth in West Germany has brought about a far more equitable distribution of incomes, wealth, and opportunity than in the United States, let alone Russia or China. Some groups and some regions are lagging, and wealth inequality has been rising slowly, but the gaps are much narrower than in the United States, let alone Russia or China, and Germany’s political system is much more responsive to dealing with these problems than is the case in the United States. Grasping the reasons for the German difference is crucial. Germany’s relatively equitable distribution of resources came about neither because of large-​scale redistributive policies nor the self-​governing functioning of a market economy, but rather because the institutional design of the country’s economy deliberately works to ensure that all parts of society benefit from growth. “Prosperity for all,” the goal of the German government in the early postwar years, has largely been

 

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The Returns to Power

achieved. One consequence is that the trend toward right-​wing extremism in Germany has been far less successful than in the United States. There are multiple reasons for Germany’s better performance, but lower inequality is an important one. Our deep and growing economic inequality has fostered a merger of concentrated economic power with the interests of a political elite intent on maintaining power through antidemocratic means. Continuing on this course would result in a regime bearing all the hallmarks of fascism. Fascism and other forms of right-​wing authoritarianism are much more likely under conditions of high and rising inequality. When economic polarization between rich and poor grows, it means that the middle-​income segment of the population is shrinking. This has been happening in the United States and helps explain the rise of polarization and extremism. A decline in the share of people in the middle reduces the proportion of people who share common economic interests and life experiences and benefit from an equitable distribution of opportunity, for example by good public schools. Our rising economic inequality has exacerbated older historical legacies of slavery and Jim Crow segregation, the divide between urban and rural communities, and other social divisions. But here, again, the comparative perspective is essential. Russia and China have deep traditions of autocracy, but so too does Germany. Yet market reforms in Russia and China have led to high inequality and strangling of democratic rights, whereas Germany’s postwar economic liberalization has produced economic growth without compromising a reasonably equal distribution of opportunity or democratic government. And although the open wound of slavery has compromised basic American democratic institutions from the start, we have also had periods of significant changes in our social and political life that reduced inequality and expanded opportunity. Historical legacies do not foreclose policy choice over whether democratic rights flourish or not, and how the gains of economic growth are distributed. Unless we ensure that open markets yield a balanced distribution of benefits by subordinating market competition to impartial rules protecting society’s shared interests, we will allow the market to favor the rule of the stronger over the weaker and market participants to shape policies and institutions to their benefit. The cases of Russia, China, and Germany therefore serve in this book to illustrate the different pathways a major turn to economic liberalization can take. In the United States, Russia, and China, those who gained an early advantage from the opening of the economy to market-​oriented activity worked to lock in their advantage by forming mutually beneficial relations with those in politics who had the power to deliver them continuing returns. Those alliances formed and played out in different ways, as I will show, but in each case, the advantages of the advantaged were compounded over time, with a portion of them converted into

 



The Threat to Democ rac y

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political influence. To be sure, economic liberalization in the United States was less transformational than was the dismantling of central planning and control in the cases of postcommunist Russia and China, and power is far more pluralistically dispersed in the United States than it was in those countries. They are useful reference points for the United States, nonetheless, because they exhibit in extreme form tendencies in the development of their economies and political systems that have played out in the United States over the past four decades. In Germany, on the other hand, the relatively even distribution of gains from the opening of the market economy across labor, big and small business, farmers, pensioners and others has helped to ensure a much more balanced distribution of political resources. This balance sustains open democratic competition, which guarantees political equality of rights. It provides broad political support for maintaining an economic order that delivers on the promise of “prosperity for all,” and a political order that guarantees enforceable political rights to all citizens. My premise is that even though each of these four countries began its liberalizing reforms under its own distinctive set of circumstances, in the United States, Russia, and China they had comparable effects in creating the political and economic conditions driving extreme income inequality. In Germany, liberalization had different consequences in part because the underlying understanding of liberalism was different. My assumptions about the motivations of economic and political actors are fairly basic. Politicians everywhere want to hold on to power. Businesspeople who are economically successful want to remain so. Business firms find it more convenient to cultivate friends in government to fortify their market advantages than to assume risks in the face of market competition. Where they can, they are likely to ally with their friends in government to do so. These are by no means new ideas. Adam Smith’s famous comment is often cited: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Rent-​seeking, in short, is not unique to any one society or time in history. I believe that this is why it is both possible and necessary to take a political economy approach to explaining the similarity between inequality in the United States, Russia, and China, and the relative equality in Germany. Our perspective must incorporate politics, it must be comparative, and it must be informed by history. It is true that there are similar trends toward rising inequality in the distribution of pretax incomes throughout the world. But compared with other developed democracies, income concentration at the top is higher in the United States and the share of incomes at the bottom is lower. It is this difference that I seek to explain here. The simple argument is that to the extent that rents drive economic growth, growth widens economic inequality.

 

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The Returns to Power

The logic of these comparisons structures the book. Chapter 2 introduces the concepts scholars use to describe economic inequality—​income and wealth shares, the Gini index, pre-​and post-​tax income, the relationship between income and wealth, hidden income, inequality across geographic units, and the fractal nature of income distributions at the top. Then in Chapter 3 I lay out the basic points of a theory of inequality that combines the political force of rent-​ seeking and rent-​sharing with the market forces affecting incomes in the labor market. Chapter 4 shows how rent-​seeking in the United States has been fostered by the market reforms launched from the late 1970s—​deregulation, tax cuts, weakening labor, reducing social spending, corporate governance standards—​ and shows how these have created new opportunities for rent-​seeking in several sectors of the economy, including healthcare. Chapter 5 turns more directly to the ways in which rent-​seekers in the marketplace build their political ties and use them to limit competitive risks and guarantee rents, linking these to the ways the American political system has developed in response to these pressures. It argues that an alliance founded on the mutual self-​interest of corporate actors and politicians has dominated policymaking, underpinned by doctrines developed and promoted in think tanks, advocacy groups, lobbying organizations, universities, and the mass media. The chapter then outlines the efforts by this coalition, above all through the Republican Party, to restrict access to voting rights and to take advantage of the built-​in institutional distortions of equal political representation in our Constitution. The notion is that the relationship between corporate interests is not one of “capture” of government by the wealthy, but of an exchange of benefits between self-​interested politicians who want to reduce competitive threats to their political power, and corporate interests that want to shape a market environment enabling them to seize and hold rent-​ appropriating power. Chapter 6 discusses financialization, defined as the increasing share of business profits flowing through the financial services industry. I argue that financialization in the United States has become a source of rents comparable to that of the natural resource sector in Russia, providing a steady source of incomes for those in power, and a source of rents that widen economic inequality. Then Chapters 7, 8, and 9 take up the cases of Russia, China, and Germany. In each country, a major turn to economic liberalization significantly altered the subsequent flow of economic resources and political power. Russia and China illustrate the ways market liberalization opens opportunities for an alliance of wealth and power to form and to throttle subsequent moves toward economic liberalization and political democratization. The German case shows an alternative form of a liberal market-​oriented economy that reinforces democracy rather than undercutting it. The final chapter, Chapter 10, sums up the conclusions

 



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from the preceding chapters about the political sources and consequences of inequality. Ultimately, as injurious as high inequality has been to public health, social cohesion, and economic opportunity in America, the greatest threat it poses is more fundamental. The most important reason to care about inequality lies in its power to destroy democracy. Let me forewarn the reader. Much of the story, certainly the American, Russian, and Chinese cases, is discouraging. And yet it is important to underscore a more optimistic thread that runs throughout the book. Historical legacies do not foreclose policy choice over whether democratic rights flourish or not, and how the gains of economic growth are distributed. Unless we ensure that open markets yield a balanced distribution of benefits by subordinating market competition to impartial rules protecting society’s shared interests, we will allow the market to favor the rule of the stronger over the weaker and market participants to shape policies and institutions to their benefit. Therefore in the final chapter I seek to outline a new public philosophy to reconcile economic liberalism and liberal democracy. This book took shape over many years. The seed was planted when I began comparing income shares data across countries, using the data then available. The similarity in the structure in the income shares by quintile of the United States, Russia, and China puzzled me. I began trying to understand whether these three different countries had reached a similar outcome by entirely different processes or whether there were some deeper commonalities in the reasons for the similarities. As I read more of the literature on economic inequality in the United States and other countries, I began teaching a seminar at Emory University dealing with the relationships between political and economic factors shaping income distribution. I have continued to teach the seminar as a visiting professor at Harvard University. Teaching the seminar has greatly helped me in seeing the relationships among politics and economics, spatial and temporal processes, and policy feedback loops more deeply. My background as a scholar of communist and postcommunist politics has given me an unusual vantage point for studying inequality in America. Since my dissertation research at Yale University in the 1970s on the Russian communists’ efforts to construct a socialist economy, I have been interested in the relationship between economics and politics and the ideologies deployed to make them appear rational and just. The Bolsheviks believed they could construct an economy based on planning and state administration that entirely superseded what they understood to be the exploitative and wasteful nature of a capitalist market economy. They were fascinated by—​both horrified by and attracted to—​the immense concentration of economic power in the hands of giant capitalist industrial and financial trusts that dominated the world economy at the end of the 19th and beginning of the 20th centuries. They thought their revolution would

 

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The Returns to Power

take over those centralized structures and turn them to use to build a modern socialist state. As Lenin put it, “State capitalism is something centralized, calculated, controlled and socialized, and we lack this.”22 Much of my research on Soviet politics concerned the relationship between ideology and politics. When Gorbachev launched his reforms, including glasnost, the transformative policy of permitting vigorous debate about basic principles of socialism and market economics, writers could argue that the foundation of Soviet power was coerced labor.23 Therefore market relations in the economy would not only enhance efficiency, but also fundamental fairness in social relations. Throughout the history of Soviet, East European, and Chinese communist regimes, periods of high Stalinist mobilization—​greater centralization and state control over economic activity—​alternated with periods of relaxation, when elements of market incentives were introduced as a means of motivating greater effort, innovation, and productivity. I spent a great deal of time in Russia in the early 1990s studying the Yeltsin-​era reforms that sought to replace state socialism with an open, market-​oriented economy and democratic political system. I interviewed hundreds of elected political officials about these changes and helped lead round-​table workshops around the country about the institutions and practices associated with Western parliamentary democracy. By the end of the 1990s and beginning of the 2000s, as it became increasingly evident that Russia had failed to construct either a working democracy or a prosperous capitalist economy, I sought to understand the reasons for the gulf between the aspirations of Russian and Western reformers and the realities on the ground. I wrote a book exploring the reasons that regions with a somewhat more pluralistic political environment were producing higher growth rates accompanied by higher inequality, whereas the most closed, autocratic regional regimes featured the lowest growth, lowest incomes, and lowest inequality.24 Why was it that in times and places when Russia‘s economy was growing, inequality grew with it, whereas in times and places of recession, inequality fell? When is growth inclusive and when does it feed inequality? In the early 2000s, my research and teaching expanded to include China and focused again on the way income and wealth distribution have been shaped by the regime’s market reforms. I took up the study of Chinese in order to read research studies and official reports in the original. China’s pattern is quite different from Russia’s, of course. China has succeeded in creating a highly dynamic economy, with a vast entrepreneurial sector, and has transformed the lives for the better for nearly all citizens. Yet, at the same time, China’s policies have encouraged the same extreme concentration of incomes and wealth at the very top that we have seen in the United States and Russia. And, as in Russia, it has stifled any impulses to establish political equality and democratic competition. The link between high inequality and autocratic rule cries out for attention.

 



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My interest in Germany began in 1965 when I spent a summer as a high school student living with a family in Germany. My German parents were of the war generation and had fled the Soviet occupation zone at the war’s end. Like many West German families, they had relatives dadrüben—​“over there,” that is, on the Eastern side of the border. The Cold War, the contrast between socialism and capitalism, and the deep wounds in German society from the war became real for me. Since then I have spent a great deal of time in Germany, teaching and lecturing, and visiting my German family. I have also followed the scholarly literature on Germany’s postwar development. The divergent trends in the American and German economies and political systems have become increasingly evident. The standard ways of framing comparison between Germany and other high-​income capitalist democracies fail to capture some of the ways in which Germany’s path is distinctive, particularly in view of the total reconstruction of its economy, society, and political system after the war.25 Moreover, Germany has continuously proven wrong the many observers who declared that the German model’s successes in the early postwar years could not continue and that its system could not adjust to challenges such as unification, labor conflict, globalization, the digital technology revolution, and immigration. The critics may yet be vindicated, but, so far, Germany’s system has proven adaptable to many stresses. Its democracy, its prosperity, and its relatively low inequality call out for deeper investigation. I wrote this book because, like many Americans, I have become more and more worried that high and rising economic inequality is subverting democracy in the United States. This concern has increasingly become the focus of academic scholarship. When she became president of the American Political Science Association, Theda Skocpol convened a task force to assess existing knowledge about the threats to democracy in America from high and rising inequality.26 A number of scholars have called attention to the feedback effects from policies and nonpolicies or policy drift to the distribution of politically relevant resources. They show that over time, the cumulative result of the shift of risks and costs associated with labor markets to individuals and households, as well as to the taxpayers, has encouraged a further accumulation of incomes and wealth at the top and stagnation or decline of incomes among middle-​and lower-​income strata.27 Concern about the dire effects of inequality on democracy is growing among economists as well, including economists of a libertarian bent, such as Luigi Zingales and Raghuram Rajan. In a book published in 2004, they made the point that while capitalism requires competitive markets, capitalists themselves recurrently pose a threat to market competition because of their desire to capture control of the market through political influence.28 In subsequent works, both have pursued similar lines of thought. In scathing language, Zingales

 

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wrote: “The interaction of concentrated corporate power and politics is a threat to the functioning of the free market economy and to the economic prosperity it can generate, and a threat to democracy as well.”29 He compared the alliance of wealth and power to the pernicious influence of the Medicis on Florence, calling it the “Medici vicious circle.” This book develops a similar argument, less colorfully, but based on a comparison of countries that are not normally considered within the same framework.

 

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Growing Apart Trends in the Distribution of Income and Wealth

2.1.  The Interplay of Politics and Economics This book offers a politically based explanation for the rise of economic inequality in the United States over the past 40 years. By economic inequality I mean the distribution of income and wealth. Although income and wealth are closely related, they are different things. Incomes are flows; wealth is a stock. Incomes flow in and out, while wealth accumulates or dissipates. Both are distributed unequally in every society, but wealth is almost always more unequal in its distribution than income. The relationship between income and wealth is recursive; that is, they feed one another. Income saved can turn into wealth, and wealth, if accumulated in the form of productive capital, such as rental housing or dividend-​yielding stocks, can yield income. Wealth when it is sold also generates income. And, as Joseph Stiglitz reminds us, wealth and capital are not the same thing. Income saved can be invested into capital, which yields a return in the form of income, or spent to acquire other kinds of wealth, such as yachts, villas, and art. Investing in children’s educations and upbringing is another form of investment that tends to concentrate wealth and income across generations. These assets may be converted into income when they are sold, or left as an inheritance.1 Since households with higher incomes tend to save a higher proportion of their income, they accumulate wealth more rapidly than those with lower incomes. Increasing returns to wealth widen inequality over time. Advantages and disadvantages of wealth, education, health and connections perpetuate themselves across generations. One of many reasons to care about high economic inequality is that it reduces equality of opportunity. Higher inequality is one reason that rates of social mobility in the United States have fallen well below Canada or Europe.2 The Returns to Power. Thomas F. Remington, Oxford University Press. © Oxford University Press 2023. DOI: 10.1093/​oso/​9780197685952.003.0002

 

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We can decompose inequality trends into the changing distribution of incomes at the top, middle, and bottom. Sometimes it is said that the reason for rising inequality is that incomes at the bottom are stagnating while incomes at the top are growing. This is certainly true as a matter of accounting, but it does not tell us anything about the causes of rising inequality. In this book I seek to probe the combination of economic and political forces that are pushing inequality higher. But it is important to distinguish what is happening at the top, in the middle, and at the bottom, because different factors are at work for each part of the distribution. We also need to dissect economic inequality in other ways, identifying differences in income and wealth by race and ethnicity, gender, educational level, and other social categories, as well as by geographic unit. Spatial and social differences often overlap, as when poor and rich people cluster in different residential neighborhoods, with different levels of access to schooling and public health. The research shows that these differences not only overlap: they also reinforce one another. Higher-​income neighborhoods have better schools, parks, and public services than lower-​income neighborhoods. Therefore, because residential segregation by income has been growing, it has reinforced segregation by opportunity as well.3 Below, in the next section, I will discuss the forces pushing toward and away from the convergence of incomes across social categories and geographic boundaries. Standard economic theories expect that, given some initial gap in incomes across population groups or geographic units, market forces will tend to bring about a convergence of their incomes and growth rates over time—​what economists used to call “the iron law of convergence.”4 In fact, however, we are seeing the opposite tendency in the United States—​differences in income and opportunity across neighborhoods, cities, and regions are becoming more fixed. Both social and geographic mobility are declining as income and wealth accumulate at the top. We also have to break down income by source. In the United States (as in Russia and China) nearly all of the rise in income inequality in the last 40 years has come about because of the dynamics of income from work; only a small share of people at the very top (roughly, the top 1%) derive a majority of their income from capital—​dividends, real estate rents, capital gains, and the like.5 Incomes from the labor market include wages and salaries, which make up by far the largest share, but also bonuses and other kinds of incentive pay. When executives receive stock options, we can treat them as current income or wait until they are realized and treat them as income then. In some countries, Russia and China among them, base pay is often less than half of total compensation for many employees. Bonuses and other special payments (e.g., “13th month” pay), holiday pay, performance-​based incentive pay, and the like can make up the great majority of compensation). Likewise the compensation of the CEOs of

 



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American private-​equity firms is likely to consist of relatively small base salaries (small meaning in the range of a few hundred thousand dollars) and very large flows of dividends and “carried interest.”6 In 2018, the two co-​CEOs of the private-​equity firm KKR each received $55.6 million in carried interest and over $40 million in dividends on top of base salaries of $300,000.7 The distinction between labor income and capital income matters when we are trying to account for the distribution of national income. Traditionally, economists assumed that the total shares of national income going to labor and to capital were roughly constant.8 In recent decades, we have learned that this is not the case, either in the United States or in other countries. Moreover, a growing part of national income cannot be readily assigned either to labor or to capital—​some economists call it “factorless income.”9 What is clear is that the share of national income going to labor in the United States is declining, as in many other countries as well; it may also be the case that capital’s share of income is declining as well, which would contradict older economic theories.10 The increasing importance of intangible capital, such as proprietary software and algorithms, in generating value added may help explain why labor share is declining at the same time as the capital share. To some degree, the distinction between capital income and labor income is arbitrary. Economists must make assumptions about how to treat business income, for example, which combines income from labor and income from the physical and intellectual property an owner’s company possesses. For example, an automobile dealer whose company is organized as an S corporation11 pays taxes on business income at the rate of personal income. How much of that income is a return on the capital of the business, including the inventory of cars for sale, and how much is due to the skill of the sales team? Economists Emmanuel Saez and Gabriel Zucman classify half of the income to owners of pass-​through businesses as labor income and half as capital income, but they recognize that that is a rough rule of thumb.12 The point is that at a certain point, the distinction between capital income and labor income is a matter of definition. Since capital income is still a relatively small share of household income in the United States, our real question in explaining inequality is why labor incomes have diverged so much. The simple answer is that we cannot explain rising inequality in wages on the basis only of market forces, the play of supply and demand. Wage differences are also influenced by power dynamics both inside and outside the workplace. When employers have power over their employees, for example, restricting their ability to leave their jobs, wages are held down. Slavery is an extreme example, but in many settings short of slavery, labor is also less than free. For example, many American workers are required to sign arbitration clauses waiving their rights to sue their employers for violating their rights or to sign noncompete clauses (meaning that they may not go to work for another

 

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company in the same industry—​in some cases, even another fast-​food restaurant with the same franchise).13 Female migrant farmworkers in California, Florida, and other states are commonly subjected to sexual violence in what are known as “panty fields.”14 Immigrant workers are regularly cheated out of overtime pay.15 All these facts are well documented. I cite them here only to make the point that labor markets do not function in an abstract world of supply and demand in which employers and workers are equal and free agents; they are shaped by the environment of power relations in which they are embedded. Accounting relations can tell us where inequality is located in the distribution of households by income and wealth level. But they cannot tell us why income and wealth have become so unequal. The premise of this book is that purely economic explanations are necessary but not sufficient. Only a theory that brings politics into the picture can explain why inequality has grown so much in the last 40 years. Some economists hedge and call everything that is not markets “institutions,” by which they mean the rules governing market transactions. But this sweeps a lot out of sight, for example the deliberate weakening of labor bargaining power by government and big business over the past 40 years, a regulatory regime that provides special protections for “systemically important banks,” an antitrust philosophy that allows powerful companies to throttle competition, a policy at the IRS to audit the tax returns of the poor with much greater frequency than those of the rich,16 tax rules that let people shift their reported income from labor to capital, and spending decisions that starve public goods but provide tax advantages for spending on private education and healthcare. Institutional rules are set through the play of political power and interest in the political system.17 There, those with greater political resources have an advantage. A theory of the distribution of income and wealth cannot ignore the distribution of power. Economists know that real-​world markets do not operate under conditions of perfect competition, as they do in theoretical models. But many argue that markets are close enough to being frictionless that we can use economic theory to explain the outcomes we observe. They also believe that in the long run, markets tend toward an equilibrium between demand and supply, price and quantity. For their part, political scientists have tended to concentrate on electoral behavior, interest group lobbying, and other formal institutions of political representation to explain inequality.18 As crucial as these factors are, it is how they interact with the economy that matters most. Moreover, comparative treatments of the subject tend to be limited. Most often, they compare the United States with other rich industrial democracies (e.g., Organisation for Economic Co-​operation and Development [OECD] countries). More commonly, economists and political scientists treat the United States as a universe unto itself. For example, economic explanations of the way the “market for talent” drives the extremely high

 



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compensation packages of top executives fail to ask why the market for talent does not produce similarly outsized pay for equally globalized CEOs in Europe.19 Let us begin start by asking what inequality means and how we measure it.

2.2.  Grasping Inequality Averages conceal differences. One reason many people find it hard to think of growing economic inequality as a serious problem is that they think in terms of averages—​average income, average earnings, GDP per capita, and so on. It is true that average income and GDP per capita in the United States have been rising steadily for many decades, with downturns during severe recessions. See Figure 2.1. The problem is that averages conceal the actual distribution of income and wealth. If we break down the numbers according to who receives what share of income and wealth, the trends are very different. The reason that average income has been rising is that nearly the entire share of the increase has gone to those at the very top. One way to see this is to look at the shares of income and wealth received by everyone below the 50th percentile of the income and wealth distributions, as shown in Figure 2.2

300000

United States: Mean income and GDP per capita have risen together, while mean wealth has soared

PPP value in constant €2021

mean per adult wealth 200000

100000 per capita GDP mean personal income 0 1940 Source: WID.world

1960

1980

2000

Figure 2.1:  US Average National Income, Wealth, and GDP per capita, 1945–​2021

2020

 

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The Returns to Power For the bottom half of the distribution, income and wealth as a share of the total have declined in recent decades .2

Bottom half income share

Share of total

.15

.1

.05 Bottom half wealth share

0 1940

1960

1980

2000

2020

Source: WID World

Figure 2.2:  United States Pretax Income and Wealth Shares of the Bottom 50% of the Distribution, 1945–​2021

As these graphs show, since the late 1970s /​early 1980s, the middle and lower ends of the distribution have been doing worse and worse relative to the upper half. Some will object that taxes and transfers reduce inequality, so that these figures showing the shares of income on a pretax basis do not reflect the distribution accurately. It is true that taxes and transfers mitigate inequality to some degree. But the amount of redistribution they bring about has been declining over time, so that post-​tax inequality is less and less different from pretax inequality. In, fact, since 1979, for the top 1%, cumulative income growth on a post-​tax and transfer basis has been greater than on a pretax basis. Cumulative pretax income growth for everyone below the top quintile was only one-​third over that period. For the middle three quintiles, even after taxes and transfers, cumulative income growth was still less than 50%. Whether on a pre-​or post-​tax basis, income gains in the United States have gone overwhelmingly to those at the top. According to one recent estimate, if income growth over the last 40 years had been distributed the way it was during the previous 30 years, total disposable income for everyone below the 90th percentile would have been 67% higher by 2018.20 Therefore we should rely on measures of the median, asking how the median income or wealth has risen or fallen. How wide is the gap between the mean income, driven by gains at the top, and the median? If mean income grows faster

 



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than median income, that tells us—​by definition—​that inequality of income distribution is growing. A recent OECD study shows that wealth inequality rose substantially in the United States after the Great Recession.21 Although across the OECD (28 countries) wealth inequality is twice as great as income inequality, it is highest in the United States. Mean wealth of US households rose modestly over the 2006–​ 15 period, while median wealth dropped sharply (about 4.6% per year on average, in real terms).22 One reason is that the value of the assets held at the top recovered after the shock of the financial crisis, and rose steadily, whereas the assets—​above all housing—​held by the majority of the population declined in value relative to household debt. The bottom 40% of American households in fact have negative net assets—​assets net of liabilities. We can see the widening difference between median and mean incomes graphically by comparing median and mean household income growth in the United States (Figures 2.3a and 2.3b). Median income has lagged well behind mean income, although there was some increase starting in the Obama presidency as the labor market began to tighten. In 1950, the median household’s disposable income was 80% of that of the average household. By 2016, it was just 10%. The rich had pulled far away from the middle class.

Household income trends, 1949–2016 2016 US$ 1.0e+06

800000 Income, USD

Mean total income 600000

400000

200000 Median total income 0 1940 1960 1980 2000 Source: US Federal Reserve Survey of Consumer Finance Replication files from Moritz Kuhn, Moritz Schularick, and Ulrike I. Steins, Income and Wealth Inequality in America, 1949–2016. Journal of Political Economy 128: 9 (September 2020), pp. 3469–3519.

2020

Figure 2.3a:  US Mean and Median Household Income, 1949–​2016 (inflation-​adjusted 2016 $)

 

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Net wealth, thousands of USD

15000

Household net wealth, 1949–2016 In thousands of 2016 US$

10000

500

Mean net wealth

Median net wealth 0 1940 1960 1980 2000 Source: US Federal Reserve Survey of Consumer Finance Replication files from Moritz Kuhn, Moritz Schularick, and Ulrike I. Steins, Income and Wealth Inequality in America, 1949–2016. Journal of Political Economy 128: 9 (September 2020), pp. 3469–3519.

2020

Figure 2.3b:  US Mean and Median Net Household Wealth, 1949–​2016 (inflation-​ adjusted 2016 $)

Wealth inequality is far more pronounced than income inequality, and, again, the great divergence of the top end from the middle began in the late 1970s. As Figure 2.3b indicates, the net worth (total assets minus liabilities) of those at the 90th percentile by wealth has been subject to fluctuations from swings in the financial markets, but it has recovered substantially since the Great Recession. The net wealth of the average household has tracked that of the 90th closely. On the other hand, the net wealth of the median household has hardly budged. When median incomes stagnate, the middle class stagnates, since in economic terms, the middle class of a society consists of the households in the middle of the income distribution. That is, by definition, the middle-​income group consists of those with incomes higher than some threshold but below the threshold marking those with higher incomes. There is no scientific definition for the middle class, in America or anywhere else. But if the notion of a middle class has any meaning, it is that it comprises the big group of people in the middle of the income distribution. A society polarized between a large class of impoverished people and a small elite with high incomes is one where, by definition, the middle class is small. If the great majority of the population of a society lives in the middle band, with many fewer people who are poor or rich, it is a middle-​class society. The level of median can change, but so can the size

 



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of the band of people who are somewhat above or below the median. Both can grow, stagnate, or decline over time. We think of the United States as a middle-​class society. To some extent this is still the case. But the middle class has been shrinking over the past four decades, while the shares of the population above and below it in the income distribution have been expanding. Only around a third of households in the United States are now in the middle-​income category. (See Figure 2.4.) The figure shows that the share of middle-​income households plummeted starting in the 1970s and only leveled off in the 1990s, while the share of households in the top group began rising in the 1970s and only leveled off at about 30% in the 1990s. Meanwhile, the lower-​income group’s share rose slowly but steadily. These figures understate the actual growth of top-​end incomes, because they only show what has happened at the line dividing the top 10% from those below. If we included the top 1%, top 0.1%, and so on, the graph would show an even higher rate of growth of income shares at the top over time, consistent with Pareto’s law.23 One implication of these figures is that the social ties connecting the richest strata in society to the middle-​income group have weakened; their range of US population: shares of top, middle, and bottom income groups 1949–2016 50 Bottom Percent of population

40 Middle 30 Top 20

10 1940

1960

1980

2000

Top = incomes at the 90th percentile and above middle = incomes from the median to the 90th percentile bottom = receiving less than the median income Source: US Federal Reserve Survey of Consumer Finance replication files from Moritz Kuhn, Moritz Schularick, and Ulrike I. Steins, Income and Wealth Inequality in America, 1949–2016, Journal of Political Economy 128: 9 (September 2020), pp. 3469–3519.

Figure 2.4:  Trends in the Income Shares of Upper-​, Middle-​, and Lower-​Income Households, 1949–​2016 (inflation-​adjusted 2016 $)

2020

 

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choice over neighborhoods for residence, schools and healthcare, recreation and amenities, and even their tastes in consumer goods diverge. They are less and less likely to find common cause with those in the middle, let alone those at the bottom. Moreover, the shrinkage of the middle-​income group as a group in society has severe consequences for our political and social well-​being. Therefore, even though we cannot mechanically equate the “middle-​income group” of these calculations with all the social characteristics we usually ascribe to a “middle class,” the two categories overlap strongly, and we can use the mathematically derived category of the middle-​income group—​those between two-​thirds and twice the median—​as a rough gauge to the trends affecting the more nebulously understood aggregate we could label the middle class. Because social science has repeatedly shown that a large middle class in a society tends to be a positive force both for democracy and for social stability, expanding the middle class is a desirable public policy goal.24 But even as a matter of arithmetic, if the size of the middle-​income group is growing, it means that the size of those in the low-​ and high-​income groups is shrinking—​which, by definition, also means that inequality is falling. In this book, I will use the median as a measure more than the mean. The median (or 50th percentile) is that point in a distribution where there are equal numbers of people above the point and below the point. It is a more meaningful measure of the distribution of income and wealth than is the mean. An often-​ cited illustration is the “Jeff Bezos” example: suppose we are at a big party with a group of people of different incomes. Jeff Bezos walks in. Suddenly the mean income of the people at the party goes up—​but the median income hardly changes at all and none of us is any richer, so the mean income is a meaningless measure. An old Russian anecdote about the “average temperature in a hospital” makes the same point. Some of the patients are running a high fever; others are stretched out in the hospital morgue. So the fact that the average temperature of the patients is normal tells us nothing about how sick any of the patients actually is.

2.3.  Denying, Defending, and Deflecting Inequality Many scholars, especially those of a conservative bent, argue that mean income is what matters, not how it is distributed.25 Worse, they warn, an excessive preoccupation with inequality is dangerous, because it deters productive investment by creating pressure for higher taxes and regulation, and inducing fears of socialism and redistribution among investors.26 Poverty, poor education, poor

 



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health, and other social problems should be addressed, they argue, but not inequality. Inequality is the property of a group, but poverty and poor schools affect individuals and families. Therefore fix the problems that affect actual people, rather than the more abstract question of inequality across groups. This thinking holds some appeal, but it is ultimately a fallacy. Ample evidence exists to show that inequality has effects of its own that cannot be reduced to the effects of poverty, low education, poor health. It is true that the latter problems do occur at the individual and family level, whereas inequality always is an aggregate, the property of a collectivity. For that reason, inequality is harder to grasp. Some people tend to associate inequality with poverty. But this is also a mistake. Empirically, inequality can rise in a society even if poverty declines. When inequality reaches a high level, as it has in the United States, it produces serious consequences that are distinct from poverty. Four in particular have been identified in the literature: inequality’s effects on public health; the social and political polarization it deepens; the damage it does to economic opportunity and mobility; and the brake it imposes on economic growth. First, a considerable body of literature shows that high and rising inequality worsens public health, quite apart from the effects of poverty. For example, even controlling for other individual-​level factors, people in lower-​income counties have worse health.27 Access to healthcare and quality of the environment vary significantly across social class, race and ethnicity, educational level, and neighborhood, helping to explain the strong association between mortality rates and economic inequality.28 There is also a significant association between the level of economic insecurity prevailing in a county and the rate of “deaths of despair” (i.e., deaths from drug overdoses, alcohol poisoning, chronic liver disease, and suicide):29 counties classified as being at the highest level of economic insecurity have rates of deaths of despair that are 60% higher than rates in counties with the lowest levels of insecurity.30 The evidence strongly indicates, therefore, that in addition to individual-​level risk factors, community-​level influences also contribute to the heightened number of deaths of despair. Even among twins and siblings who have been raised together, and even when controlling for their history of smoking, alcohol use, and cancer or heart disease, and controlling as well for their age, race or ethnicity, sex, and parental education, a person’s mortality rate is 5% lower for every additional $50,000 in net worth at midlife. Here, of course, wealth is standing in for all the advantages it can confer: healthier habits, better-​quality nutrition, better access to medical care.31 Living in scarcity and insecurity affects our mental calculations—​our time horizons shorten, and we tend to live for today rather than tomorrow. We are more likely to seek immediate gratification than to be willing to postpone it until tomorrow.32

 

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Geographic differences lock in differences in health. Poor areas become “health-​poverty traps,” where low-​quality education and healthcare, limited job opportunities, high insecurity, and pervasive malaise contribute to poor health. Counties with the highest percentage of people living in the same county where they were born are also those with the worst levels of health and well-​being.33 For these reasons we have to recognize that inequality, not just poverty, affects our health as a country and as individuals. Of course it matters a great deal if a household cannot meet basic subsistence requirements or faces bankruptcy owing to a catastrophic illness. However, relative poverty and relative well-​being matter as well. People want to live in dignity, often defined not in absolute terms but by comparison to the way others live. For that reason, OECD and other studies of inequality use relative measures of income to assess inequality. They may define the lower-​income group of a society as those living below the level of two-​thirds or three-​quarters of the median: the median may be rising, so that absolute incomes are rising; but if the number of people who live below two-​ thirds of the median is growing, inequality is growing.34 Although scarcity has clear consequences, so too does inequality.35 Second, inequality fuels social and political polarization. In part this has to do with our tendency to compare ourselves to others, judging whether we are higher or lower on the ladder of life, and whether we consider ourselves winners or losers, successes or failures.36 As the rungs on the ladder of life grow farther apart, we are less likely to see ourselves as like those below or above us, to consider ourselves affected by the same forces as they, or to want to share similar costs and benefits in social policy. Likewise, as we look upward at those we see as being above us, if they are far above us and we lose hope that we can reach their level, we often feel demoralized.37 Demoralization from a sharp loss of relative status is one reason that the rise in deaths of despair has been concentrated among groups of people (in particular, White working-​class men) who suffered the greatest relative losses in status and security from deindustrialization.38 The loss in relative social and self-​esteem may be one reason that, over the 20-​year period from 1999 to 2018, the health status of low-​income Whites steadily declined to the point where, by 2018, poor Black and poor White adults had the same rates of poor health.39 Study after study has confirmed that for those lower in a social and power hierarchy, the effect of comparing themselves to those higher than they in the hierarchy is associated with measurable negative outcomes, including poor health and self-​destructive social behaviors. Meantime, those who are relatively higher on the ladder tend to think of themselves as entitled to their status. (This effect can even be generated in simple experiments, when people are dealt hands of cards at random and told whether their hands are better or worse than those of other players).40 When we see ourselves as lesser or lower than others, we are social creatures, and we are hard-​wired to compare ourselves to others in

 



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judging ourselves. Considering ourselves looked down upon induces psychosocial stress and is manifested in worse health. Perceptions of fairness are shaped by social comparison. A considerable body of social science research shows that people compare themselves to a relevant reference group. The reference group can be others similar to them in social circumstances or at least not too far distant. The reference point might be their own past, or their parents’ circumstances. It can also center on comparing where people think they should be in the future with where they are likely to end up.41 These social comparisons are crucial for political behavior.42 The importance of esteem, the close link between how we evaluate our own worth and how we suppose others evaluate it, has long been a subject of philosophical debate.43 Social psychologists increasingly recognize that how society bestows esteem affects personal well-​being.44 As Nobel Prize–​winning economists Abhijit Banerjee and Esther Duflo write: Exclusion and misunderstanding build on each other. The extreme poor are robbed of their dignity and their agency. They are made to understand that they should be grateful for help, even when they don’t particularly want it. Robbed of their dignity, they easily become suspicious, and this suspicion is taken for ingratitude and obstinacy, which further deepens the trap in which they are stuck.45 A household crushed by poverty can fall into a trap from which it is next to impossible to escape. This is why, just as it matters to society if a person cannot meet basic subsistence requirements or faces bankruptcy owing to a catastrophic illness, relative income matters for the political health of society as well. As resentment accumulates among those who feel that they have been dealt a bad hand, often they explain their circumstances by blaming others—​dark-​ skinned people or immigrants, for example—​regarding them as “line-​cutters,” in Arlie Hochschild’s memorable metaphor.46 But rather than seek redistribution, they often blame government or liberals, immigrants or globalization.47 And wealthy interests fuel this polarization.48 As a Republican senator commented to President Obama, “I hate to say it, but the worse people feel right now, the better it is for us.”49 Among those at the top, the fear of and resistance to higher taxes and redistribution mounts. Hacker and Pierson refer to the elite use of these fears to mobilize resentment as “plutocratic populism.”50 Moreover, as our politics grows more polarized, public consensus for taxing and spending on public goods and wider insurance pools falls. Support for funding public education, public health, even public sanitation is lower, to say nothing of support for expanded social insurance programs, a higher minimum wage, or antipoverty programs.51

 

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The corollary to this phenomenon is the tendency to privatize public goods, raising tuitions for public universities, funneling resources for public education into lottery-​generated revenues, offering of tuition tax credits for private schools, securing the rich in gated communities where public amenities are club goods for the residents, offering concierge care in the health system, or selling access to VIP lanes on public highways, to cite only a few examples.52 And the inevitable companion of populist resentment of elites is authoritarianism, because democracy always threatens redistribution. Therefore inequality fuels both the drive to block democratization as well as the ability to do so. As the economic resources of those at the top are converted into political power, one result is the suppression of democratic checks and balances. This is yet another way in which Russia and China hold up a mirror to the United States. If we see those far below us on the ladder—​especially if they are darker-​ skinned—​as being not like us, we are less likely to be concerned about fair treatment for them because we do not think that what affects them will affect us.53 Social cohesion suffers. Political polarization widens. Therefore the crucial role economic inequality plays in driving social discontent cannot be dismissed in favor of concentrating only on poverty. Inequality has its own damaging effects on the cohesion of society and the degree to which it fosters social acceptance of political equality. I will take up this point further in the last chapter. Third, inequality reduces social and geographic mobility within and across generations. One reason the distribution of relative incomes or relative well-​ being matters is that gaps in the distribution of income (and related social resources, such as education, connections, family stability, neighborhood quality, and the like) become harder to close over time. As neighborhoods become increasingly segregated by social class, as has been happening in the United States since the late 1970s, relative differences become magnified over time through the self-​reinforcing effects of household and neighborhood advantage and disadvantage.54 Parental income has grown more and more closely related to how well children perform in school and other outcomes in life.55 In recent decades, rich cities have continued to maintain or increase their advantage over poorer ones; rich households have grown richer at a faster rate than poor households, and they pass their advantage on to their offspring at a higher rate. Both social and geographic mobility have declined, resulting in a wider divergence between rich and poor, Black and White, thriving and declining towns.56 The pathbreaking studies by Raj Chetty and his colleagues, which match individual IRS and Social Security records to track how specific individuals and households do over long periods of time, have shown a close correlation between parental incomes and the life outcomes of their children, including academic achievement and family stability.57 Research by other scholars shows that each successive generation has a lower chance of raising its economic and social standing.58 Although women’s

 



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incomes have tended to catch up with men’s, men in each successive cohort start out at lower starting pay and have seen smaller pay increases than the preceding generation, except for the top decile.59 And inequality within each generation has grown. Over time, inequality of condition is widening inequality of opportunity. This is now beginning to be evident in China as well, where the correlation between the lifetime incomes of parents and their children is rising.60 Meantime, educational opportunity for children born to poor and rural families is shrinking.61 In every country we find that when cross-​sectional inequality grows, so does inequality of income and opportunity across generations. Finally, economic inequality harms economic growth. For example, it results in higher levels of debt as households seek to maintain consumption by borrowing.62 This phenomenon contributes to boom-​and-​bust cycles and lower long-​term growth as well as greater uncertainty for investors.63 Across the world, societies with higher inequality tend to have less sustained growth, as boom periods are followed by crashes.64 High inequality wastes human resources, as many with the ability to contribute productively to society are shut out of the educational and employment opportunities that would benefit them and society more generally.65 As the lowest-​income strata lose the ability to contribute to the economy, both as consumers and as producers, society forfeits the social benefit of their incomes. The poorest segments of the labor force increasingly take nonstandard employment. Not only do they then lose out on economic security—​unemployment, disability, illness and pension insurance—​but their earnings are irregular, often untaxed, and unlikely to grow. They are unable to invest in education and skill development for themselves and their children. Moreover, as wealth inequality deepens, opportunities for investment narrow, reducing overall productivity for society. From a practical standpoint, greater inequality of income and wealth means that purchasing power grows concentrated in an ever smaller segment of the population. Markets for luxury goods thrive while markets for midrange goods dwindle. Dollar stores become the only source of groceries for a growing number of households.66 In turn, this means that in many poor neighborhoods, “food deserts” appear, in which the only sources of nutrition available to households within a reasonable distance are fast-​food restaurants and shops selling the lowest-​quality food products. The consequences are severe for the health of the residents of those neighborhoods (as the next chapter will detail). Poor-​quality nutrition both increases disease and death rates, and helps explain why inequality worsened the American mortality rate from Covid-​19.67 In purely raw economic terms, then, high inequality imposes multiple burdens on the rest of society, quite apart from the glaring challenges it poses to our notions of basic fairness.

 

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Conservatives offer several additional arguments that deny, defend, or deflect the fact of high and rising inequality. First, they argue that inequality in fact is lower than the numbers suggest, because the tax system redistributes income. The poor, they say, receive a lot of in-​kind and cash assistance, such as Medicaid, food stamps, and Earned Income Tax Credits. Moreover, some economists claim that the poor increase their incomes considerably by working in the “underground economy,” where much of their income goes unreported.68 Second, they claim that income is the wrong measure to use in considering inequality. Rather, it is better to consider consumption, because consumption tells us how well people can meet their basic needs.69 Third, they object that inequality measures are taken at a single point in time. Over time, however, households move up and down in the income ranks. Therefore, over the lifetimes of people in society, inequality is much less than appears to be the case if we simply take a cross section of people at a given point in time.70 Economists sometimes presume an “income-​smoothing” model of behavior, which supposes that households put money aside when times are good and borrow when times are hard, so that over time their income tends to be smoothed out.71 Fourth, they claim that the ownership of wealth is quite widely distributed as a result of the tax advantages to private savings vehicles such as 401(k) retirement accounts and IRAs, so that most retirees will be able to live in reasonable security.72 Finally, more fundamentally, conservatives contend that inequality is necessary to a society because it serves as an inducement to effort. Individuals who want to earn higher incomes go to school to raise their educational levels or work more hours. Entrepreneurs take risks and start new businesses. Workers move from a town with low opportunity to one where job prospects are better. As Finis Welch put it in a presidential address to the American Economic Association, “It is not much of an exaggeration to say that all of economics results from inequality.”73 From this basic premise it follows that if we tax marginal increases in income too much, we kill the incentive to work; beyond some hypothetical point, people will prefer leisure to labor, because the marginal utility of earnings becomes lower than that from leisure. Likewise, welfare assistance to low-​ income households harms the incentive to work. As Welch puts it, there is a danger that social safety nets for the poor become “magnets” making leisure more attractive than labor.74 Each of these objections is faulty. First, although it is the case that government taxation and redistribution mitigates inequality in the distribution of incomes brought about in the marketplace, the effect is modest, and has been declining. In fact, as the careful

 



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analysis by Saez and Zucman has revealed, the American tax system is not progressive when all taxes, including state and local, payroll, sales, and excise taxes are included. In fact, at the top, it is regressive, in that the total average tax rate paid by taxpayers at the highest end of the distribution is slightly lower than all other strata, because a higher share of their income is based on capital gains and distributions.75 As to how redistributive the tax and transfer system is in fact, we can compare the pre-​and post-​tax shares of income of different groups of people by income category. (See Figure 2.5.) For the bottom half of income earners, post-​tax and transfer income shares are higher than pretax shares both in 1962 and in 2014, and the income shares for the top decile are lower. However, for those in the “upper middle” group (those from the median to the 90th percentile), post-​tax income shares are actually higher than their pretax shares. Clearly, they have benefited from many of the policies intended to promote homeowning and education. Moreover, the mildly progressive nature of the federal tax system has hardly mitigated the enormous growth in income at the top compared with the very modest growth of incomes at the bottom over the past 40 years. In

Pre- and post-tax income shares, income categories, 1962 and 2014 1962 Top 1%

2014 1962

Top decile

2014 1962

Upper 40%

2014 1962

Bottom half

2014 0

.1

.2

.3

.4

Income share Pre-tax

Post-tax

Source: Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, “Distributional National Accounts: Methods and Estimates for the United States. Data Appendix,” November 10, 2017 [http://gabriel-zucman.eu/usdina/]

Figure 2.5:  Pre-​and Post-​tax Income Shares, by Income Group, 1962 and 2014

.5

 

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fact, post-​tax income for the top 1% has risen faster than pretax income. (See Figure 2.6.) Second, with respect to consumption, it is true that consumption in any society is less unequally distributed than income. For that reason, a minority of economists (and countries) report inequality in consumption rather than income. There are two reasons this is misleading. First, much of the consumption among low-​income households takes the form of in-​kind provision, such as Temporary Assistance to Needy Families and subsidies for healthcare. Former senator Phil Gramm and John Early claim that these and other federal cash and in-​kind transfers amount to $760 billion going to the bottom two quintiles of the distribution.76 Although in-​kind transfers such as food stamps certainly mitigate poverty, they are not income and cannot be used in the ways disposable income can. For that reason, the Earned Income Tax Credit (EITC) and a higher minimum wage are more effective means for equalizing incomes and opportunity. The EITC has an especially pronounced effect for single-​headed households, where it can encourage people to enter the labor force without losing income and reduce other types of antipoverty transfers.77 The EITC and higher minimum wage also reduce the psychosocial effects of poverty.78 A more fundamental point is that income, unlike consumption or in-​kind transfers, increases freedom. An individual with higher income has a wider range Cumulative income growth, pre- and post-tax, 1979–2016 bottom quintile and top 1% 300

Cumulative income growth, %

Top 1%, post-tax 226% 200

Top 1%, pre-tax 218%

Bottom quintile, post-tax 85%

100

Bottom quintile, pre-tax 33% 0 1980

1990

2000

2010

2020

Source: Congressional Budget Office [https://www.cbo.gov/system/files/2019–07/55413-CBO-distribution-of-household-income-2016.pdf]

Figure 2.6:  Cumulative Income Growth, by Income Group, 1979–​2016

 



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of choices over alternative uses of her resources. Raising incomes through conditional cash transfers, for example, has significant positive effects in countries where it is the principal means of reducing poverty and increasing socially beneficial behavior, such as schooling and better nutrition. In fact, as Banerjee and Duflo have found, cash transfers—​even without the strings attached—​produce good outcomes from the standpoint of both individual households and society.79 This does not necessarily imply that a universal basic income would be good public policy; the evidence on this issue is mixed.80 However, the EITC, a kind of negative income tax, is highly effective in reducing poverty and insecurity for people who are at or a little above the poverty line. Some economists point out that relative to incomes, food has been growing cheaper over time. It is true that processed food items—​those highest in salt and sugar and lowest in nutritional value—​have become cheaper. However, research shows that the low cost of cheap food is offset by its high health costs to those who consume it most. Among low-​income households, consumption of fast food is closely related with its low cost; that is, there is a high price elasticity of consumption to the cost of fast food. And the greater the consumption of fast food, the higher the probability that an individual will suffer from obesity and related problems, such as diabetes.81 The scant availability of low-​cost healthy food, and the high availability of cheap fast food, is one reason health problems are concentrated in the poorest neighborhoods and particularly among children and teenagers in low-​income households. The overlap of geographic and social inequality is one reason that health is so unequally distributed across the country, both by racial and socioeconomic category and by geography.82 Moreover, despite the seemingly low cost of food, food insecurity in the United States remains a significant problem. Around 11% of households experience food insecurity overall, but 15% of households with children do, as do almost 30% of female-​headed households.83 Although the average household spends only 9.5% on food, households in the bottom quintile spend about 36%, whereas those in the top quintile spend only 8%.84 Third, concerning the dynamics of income distribution for households over time, in fact income volatility for households has risen steadily since the early 1980s.85 Overall, from the early 1980s through 2009, total family-​level income volatility more than doubled and was greatest at the top and bottom ends of the distribution. At the top, income volatility is associated with the swings in capital income associated with ups and downs in the financial markets and business cycle. However, for the top income group, different sources of income tend to offset one another, reducing net income volatility. For the bottom decile, where family incomes have seen even higher volatility than for the top 1%, the tax and transfer system has come to play an ever-​decreasing role in smoothing out income. Unemployment and disability insurance are losing their effectiveness

 

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as buffers in insuring poor households against the loss of incomes. Moreover, gone is the earlier pattern, where the earnings of one spouse tended to compensate for shocks to the earnings of the other. Now the correlation of incomes between spouses has become positive for families at the low end of the distribution. Therefore, cuts to the welfare system and increased insecurity in the workforce mean that the poor are more vulnerable to fluctuations in income from year to year.86 As we have shifted from public provision of social insurance to private provision, we have shifted the risk of devastating loss of income from old age, disability, and illness from society to the household. Political scientist Jacob Hacker calls this policy change “the great risk shift.”87 Fourth, the belief that ownership of wealth among households is widely shared breaks down when we look at the actual distribution of assets. Although it is true that about half of American households own stock either directly or indirectly, through a mutual fund, like so many measures of income and wealth, ownership of stocks and other financial assets is highly concentrated. Only about a third of households below the median income level own stocks, whereas nearly all in the top decile own stocks. And this group owned about 84% of the total value of stocks as of 2016.88 Ownership of total financial assets, net of liabilities, has grown even more skewed since the 2007–​9 recession: the top 1% own 39.6% of all financial wealth; the top quintile owns 89.9%.89 Meantime, the median household’s net wealth is still well below the 2007 level. Finally, to what degree is it legitimate to argue that inequality is necessary as a motivator for productive activity? While some level of inequality certainly drives productive behavior, inequality in the United States has risen far beyond the level at which its benefits outweigh its costs. We can document this point empirically. The data show that economies with far lower levels of inequality than ours have succeeded in motivating people to work hard, invest, invent, take risks, and start businesses. Indeed, in the United States, economic growth and entrepreneurship were both higher in the first 30 years after World War II, when inequality was lower, than in the following 40 years. The data further show that while the total number of hours worked by Americans has been growing, those in low-​wage jobs have seen almost no increase in total earnings. In the quarter century from 1979 to 2004, the percentage of men in the workforce working more than 48 hours a week rose. However, only for those in the top quintile of wage earners did higher hours correspond to higher earnings. In other words, putting in more hours of work pays for those in higher wage brackets but not in lower wage brackets. This may help explain why hours increased most for more highly educated men in salaried occupations but fell for those in low-​wage occupations.90 Moreover, among low-​wage workers, 7 million people, or 4.5% of the total workforce, receive incomes that put them below the poverty line (2018 figures).91 They are the working poor. For them real median annual incomes

 



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have not increased in the last two decades. The problem of the working poor is particularly concentrated among women—​who are more likely head single-​ parent families and to face extremely limited job opportunity—​and those with the lowest levels of education. Likewise, employment is most unstable among the working poor.92 Low wages and limited opportunity are a major reason that labor force participation rates have fallen, particularly among young men.93 In turn, dropping out of the workforce is associated not only with the loss of income, but also with worse health and worse subjective well-​being as people’s sense of self-​worth and social status declines.94 Suggesting the power of psychosocial stress is the fact that the loss of social status from unemployment has affected less-​educated White men more acutely than it has women, Blacks, or Hispanics.95 Figure 2.7 indicates that wages—​measured here as the median weekly earnings of men employed on a full-​time basis—​plummeted in the 1980s, rose in the 1990s, fell again in the 2000s, fell again following the Great Recession, and only recovered in 2016.96 The labor force participation rate, that is, the ratio of the employed population to the adult civilian population, peaked at the end of the 1990s and still has not recovered. Although the largest share of the declining

Men’s and women’s median earnings and labor force participation rate, 1979–2021 Men’s earnings stagnated until 2012, while women’s rose in 2000s and more after 2012 men’s LFPR declined steadily while women’s rose then fell after 2000 450

80 Men’s LFPR

70

Men’s earnings 350

LFPR

Median weekly earnings, $

400

Women’s LFPR

60

300 Women’s earnings 250

50 1980q1

1990q1

2000q1

2010q1

2020q1

Source: FRED St. Louis Earnings are median usual weekly earnings for production workers, ages 16+ in 1982–1984 constant $

Figure 2.7:  Men’s Median Weekly Earnings and Labor Force Participation Rate, by Quarter, 1979–​2020

 

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labor force participation rate is due to the population aging, the fact that young people—​and particularly young men—​in their prime working years are exiting the workforce is a symptom of serious dislocations in the labor market (the fact that available jobs are low wage and low quality) and society more generally. As geographic mobility has declined, especially for low-​wage workers, more workers simply drop out of the labor force altogether.97 Although labor force participation began to recover slowly in 2010, the Covid-​19 pandemic dealt it another devastating blow. These facts indicate that incentives to induce more work on the part of low-​ income people by cutting the social safety net do not work, and indeed contribute to more exits from the labor force. They certainly trap many low-​income households into a vicious cycle where more hours of work do not yield higher earnings and long working hours at low pay make it very difficult to go back to school to gain a marketable credential. At the top, more hours worked are associated with higher incomes, but cutting marginal tax rates has not produced more productive investment; it has instead fueled ever greater inequality. The evidence indicates that current levels of income inequality in the United States are far higher than what would be required to improve well-​being for society as a whole and for individuals in it. The most powerful way to induce greater participation in employment is simple: raise wages. Moreover, as I will argue in Chapter 6, much of the inequality of income and wealth in the United States is driven by financialization, that is, the growth of the financial sector as a share of the economy. An increasing body of research now demonstrates that beyond a certain threshold, the growth of the financial sector as a share of an economy lowers economic growth and widens inequality; that is, it provides a privileged segment a larger stream of income at the expense of the rest of society.98 The United States has gone well beyond that threshold point.

2.4.  Measuring Inequality 2.4.1.  The Gini Coefficient Traditionally, studies of inequality relied on the Gini coefficient to represent inequality of income or wealth in a country. This is a simple, convenient, and easily interpreted measure of the total amount of deviation of a given distribution from perfect equality. That is, if there were a world in which every household received exactly the same share of total income, there would be no deviation from perfect equality. A society where one household received 100% of the income would have 100% deviation from perfect equality. In the first society, the Gini index would be zero; in the second, it would be 100%, or 1. The Gini can be expressed

 



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as a percentage or as a decimal (e.g., 30% or 0.3), and both ways are common in the literature. The Gini index has some virtues as a measure. It is consistent across time and across societies, so it allows us to make comparison and to track change over time. It has some disadvantages as well, however. First, the Gini index understates the effect of extremely high incomes at the upper tail of the distribution on aggregate inequality and of extremely low incomes at the bottom, while overstating the significance of small differences in the middle of the distribution.99 Second, Gini indexes are usually derived from household surveys, which underestimate total inequality. This is for three reasons—​undersampling, top-​ coding, and underreporting. As to sampling, since there are relatively few extremely rich households, they are less likely to fall into a survey sample of households. Second, in addition, their incomes are subjected to top-​coding, which means that the census agency records all households above a particular income threshold as receiving the same maximum income (e.g., everyone with an income above, say, $1 million is coded as receiving $1 million). So when we use census data or other household survey data, we do not know the distribution of incomes above that threshold. To show how serious this problem is as incomes become more and more concentrated at the top, we can look at Census Bureau household income data from microcensuses of the population.100 For 2018, there were 3 million households in that sample. Of these, the top 1% of the distribution (i.e., 30,000 households) had incomes of $565,300 or higher. Only 10 of them had incomes higher than $2 million and the highest reported income of this group was $2.58 million. However, on the basis of tax records, Emmanual Saez estimates that the threshold separating top 0.1% of the US population—​that is, the top 10% of the top 1%—​from the bottom 99.9% was about $2 million. About 150,000 families fell into that top 0.1% group.101 Their average income was about $4 million if realized capital gains are included. Clearly, the household surveys are severely undercounting the households at the very top of the distribution. Third, top-​end households are the most likely to understate or conceal their actual incomes, both to the surveyors and to the tax authorities. For example, careful estimates suggest that around two-​thirds of unreported (hidden) income in the United States goes to the top income decile and about 40% to the top 1%.102 Remarkably, the same proportion of hidden income—​itself a much higher share of total national income than in the United States—​goes to China’s top decile.103 Below, in Section 2.5, I provide more detail on the construction of these estimates. Piketty, Yang, and Zucman find that for high-​income taxpayers, actual incomes are 30%–​60% higher than reported by household surveys.104 And some

 

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estimates suggest that even higher shares of hidden income go to the highest-​ income strata in Russia.105 The methods devised by Piketty and his colleagues for estimating distributional shares, which rely on a combination of income tax declarations, surveys, and national accounts, allow for a much more accurate estimate of the share of income received by the top stratum of society. For this reason, these estimates offer a more satisfactory account of inequality that takes account of the political interests and resources of the richest stratum in these three countries. Thus a combination of undersampling, top-​coding, and hiding of incomes leads to a significant underestimation of inequality in the United States and other countries when the Gini index is reported based on household surveys.106 Why does the distribution of incomes at the top matter? First, understanding what produces a given top-​end distribution tells us something about the social and political forces underpinning it, including power relations. Second, it is precisely the highest-​income strata that have the greatest influence in shaping national policies with respect to taxation, social policy, and regulation of markets. This point applies with equal force to the democratic American political system and to the authoritarian regimes of Russia and China.107 Both individually and collectively, the wealthy in all three countries maintain mutually beneficial alliances with their political partners that exacerbate economic inequality by shaping government policies on such matters as the enforcement of competition laws, the regulation of employment relations, and fiscal policy. Let us consider the problem of undermeasurement of top-​end income more closely. Many economists have grappled with this problem in the context of the United States and of other countries. One question they ask is what the real Gini index is, given what is known about the Gini index of the measured distribution plus some assumptions about the distribution of the unmeasured part of the distribution. One standard formula is108

G actual = S* + (1 − S* ) G reported

That is, the true Gini is equal to the share of unreported income received by the small sliver of extremely rich people at the top of the distribution (S*) plus 1 minus that share multiplied by the reported Gini index. How would this apply to the United States? The US Census Bureau reports a Gini index for the United States of 0.484 for household disposable income.109 According to the Congressional Budget Office, the post-​tax and transfer income share of the top 1% is 0.132.110 Let us suppose that the incomes of those in the top 1% are not captured by the Census Bureau as a result of undersampling, top-​coding, and underreporting (an assumption based on careful analysis of existing data).111 Then the true Gini would be =​0.132

 



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+​(1 − 0.132) * 0.484 =​0.552, or about seven percentage points higher than the figure reported by the Census Bureau. These calculations are merely intended to illustrate the magnitude of the effect of incorporating the unmeasured portion of top-​end income in official estimates of inequality. Even without these adjustments, the officially reported Gini coefficients in the United States are considerably higher than in any European country. China and Russia, where still more top-​end income goes unrecorded, would see even greater adjustments.112

2.4.2.  Incomes at the Top A little over a century ago, the Italian economist Vilfredo Pareto investigated the distribution of wealth in many countries and discovered a remarkable uniformity: at the top end, distribution followed a power law. Therefore, by estimating the coefficient of the slope of a wealth distribution, it was possible to calculate how many people had wealth above any given threshold and what their average wealth was. The same relationship held as well for the distribution of income. That coefficient became known as the Pareto coefficient. Pareto calculated that it followed a 80:20 relationship. That is, Pareto found that in many societies, 20% of the households owned 80% of the wealth. Note that currently in the United States, while wealth inequality is somewhat more skewed than that, income inequality is somewhat less skewed: the top 20% of households account for almost 90% of wealth and 60% of income.113 An enormous amount of research since Pareto has gone into discovering how many real-​world economies follow this pattern. The consensus appears to be that a surprisingly large number of economies do show a Pareto distribution for incomes above a certain threshold. The Pareto distribution breaks down below that threshold. The particular threshold varies by time and place. Moreover, the Pareto coefficient itself also is different in different societies at different times, and sometimes even for different segments of the top end of the distribution in the same society. Nevertheless, Pareto’s discovery has continued to puzzle economists ever since: many of the processes that generate income and wealth inequality are linear and additive, but they yield a multiplicative effect. Why then do we observe such extreme inequality of incomes at the very top, for people who are alike with respect to levels of education, experience, social connections, talent, and other measurable attributes? There still is no good answer to this question, but there has been no shortage of ingenious efforts to devise models to explain it that are consistent with neoclassical assumptions about how labor markets work.114

 

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Power law distributions characterize an amazingly wide range of dispersions; examples include the distribution of the frequency of words in a corpus of text; the size of cities in a country by rank; the size of American corporations; the distribution of household income and wealth in a society; and many spatial-​ temporal phenomena in nature and human society—​the size of forest fires, the destructiveness of tornadoes, the size of audiences for websites, the spread of an infectious disease, cost overruns in hosting the Olympic Games, and the distances traveled by individuals.115 Moreover, so do many processes of growth. Networks follow power law distributions if a network grows by adding new vertices and vertices tend to be connected to nodes that already have many connections.116 The simplest way to understand a power law effect in growth is summarized in the Matthew principle, “The rich get richer.” In time-​related power law distributions, advantage is compounded rather than dissipated. The marginal returns to advantage are increasing, not decreasing; convex, not concave. Why power law distributions describe the accumulation of advantage is hard to explain. But we can think of it this way. Suppose that at some given time there is a set of people with a given distribution of incomes. Over time, inequality of incomes among them increases as earnings levels diverge. Those with higher earnings see higher income growth; that is, growth of earned incomes is proportional to size of income, just in the way that published articles with more citations tend to attract still more citations, and a populous city tends to attract more new residents. Why should earnings growth be proportional to earnings level? Both market-​related changes (e.g., globalization and skill-​biased technological change) and political changes (such as weakening of workers’ bargaining power) play a part. Second, the structure of the labor market changes. Fewer workers occupy the middle range of earnings levels, while more live below the middle range or above it. Third, there is a recursive relation between income and wealth: those with higher incomes invest a greater share of their income in assets that in turn yield more income. And investors with more capital have more opportunity to realize higher rates of return. This has been fostered by tax policy in the United States, which has grown more favorable to capital income, to the point where for those at the very top, the income tax system has become regressive.117 (According to White House economists, the total average federal individual income tax rate on the top 1% by wealth is only 8.2%.)118 Therefore, those with the highest incomes derive an increasing share of their incomes from investments, which they are in turn able to invest in income-​producing wealth. They also reproduce their material and social advantages across generations. The Institute for Policy Studies reports that of the top 50 families with dynastic wealth on the Forbes 400 list of 2020, 13 had been on the list in 1983; only three

 



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had joined the list in that period.119 Then the proportional growth of income and wealth at the top represents a combination of exponentials. Pareto distributions are fractal. That is, the same pattern of distribution appears at every scale—​the top 1%, the top 0.1%, the top 0.001%, and so on. They appear to form a straight line only because both the Y axis (the log of income or wealth) and the X axis (the log of rank) are logged. (1/​rank is used to show the richest at the right end of the scale). The logarithmic scale turns the curve into a straight line. The logarithmic scale turns the curve into a straight line. The remarkable fact about such distributions is whatever slice of the distribution we take, up to the very highest slice, the distribution of incomes or wealth takes the same shape. We can only explain this phenomenon as a cumulative, or Matthew, effect, rather than an additive process. Although the straight-​line log-​log power law distribution applies with uncanny regularity for wealth and income across countries, in some countries and in some types of resources, the curve bends upward far more steeply than in others. In Russia, for example, the distribution takes a sharp turn at the very top; in Germany the distribution is much flatter, as I will show in later chapters. Can market forces explain the dramatic accumulation of income and wealth at the top? Let us examine the pay of American CEOs, for which we have a fair amount of data. The Economic Policy Institute has regularly published figures on the rising gap since the mid-​1960s between the pay of the CEOs and that of the workers in their companies. (See Figure 2.8.) Moreover, inequality in the growth of earnings rose substantially over the same period, with the gains in earnings concentrated at the top. (See Figure 2.9.) From 1973 to 2019, median pay for all wage and salary workers rose only by two percentage points, when adjusted for inflation. Average pay at the 10th decile rose by only 1.23 percentage points. But at the 95th percentile, it rose 25 percentage points. CEOs’ pay has been more volatile due to the swings in the stock market. Still, their total compensation rose almost 15-​fold, from $1.21 million to $17.18 million. Two economists recently tried to explain why American CEO pay has a Pareto distribution character.120 Their model incorporates a parameter, T, which they interpret as talent. They propose that the marginal impact of a CEO’s talent is higher in firms with a higher market value; therefore higher CEO pay in a more valuable firm is an efficient outcome of the CEO’s contribution to firm value. Even small differences in talent among corporate leaders can be translated into large pay differentials because of the global scope of their enterprises. The authors offer no evidence for assuming that the parameter bringing about these differences is talent.

 

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The Returns to Power CEO to average worker compensation ratios, 1965–2018

400 Including realized stock options

300

200 Including only stock options granted

100

0 1960

1980

2000

2020

Source: Economic Policy Institute [https://www.epi.org/publication/ceo-compensation-2018/] (worker pay = mean pay for production/non-supervisory workers in the same industry)

Figure 2.8:  Ratio of CEO to Average Worker Compensation, 1965–​2018

An alternative interpretation of their parameter is at least as plausible—​that T represents CEO bargaining power relative to workers and the rest of society. That would give us a better explanation for why the returns to power are self-​ reinforcing. This explanation has the advantage of having some evidence to support it. Empirical studies have found that CEO bargaining power and luck play a significant part in setting CEO compensation packages and that much of the compensation is designed in such a way as to detach pay from performance.121 CEOs vary in their bargaining power vis-​à-​vis the compensation committees of their boards. Certainly there is no objective way to measure the correlation between variation in talent and variation in compensation packages because there is no single measure of talent that might be associated with success: one CEO might be brilliant, driven, and asocial; another might be particularly charming, lucky, or unscrupulous. All that we can say is that the model fits the observed power law distribution of corporate CEO earnings by incorporating a parameter that represents some unidentified set of attributes differentiating CEOs that in turn is associated with wide differences in pay. This model illustrates circular reasoning: if we assume that wages are set at their marginal contribution to value, and we find high wage differentials, we take that to confirm that those differentials reflect the initial variation in ability. The model recognizes the puzzling fact of a power law distribution but fails to explain it. It is implausible that

 



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Earning growth, wage and salary workers and CEOs, 1965–2019 CEO pay, in millions of 2018 $ top 350 companies, Workers: wage and salary workers, 16 years old and up, hourly pay or equivalent 80

Wages/hour, 2018 $

60

15 95th percentile

40

10

Median

20

5

CEO pay (millions 2018 $)

20

CEO pay (right axis)

10th percentile 0 1970

1980

1990

2000

2010

0 2020

Source: Wages: Economic Policy Institute, State of Working America Data Library, Wages by percentile and wage ratios%, 2019 https://www.epi.org/data/#?subject=wagegroup CEO pay: Lawrence Mishel and Julia Wolfe, CEO Compensation Has Grown 940% since 1978 [https://www.epi.org/publication/ceo-compensation-2018/] CEO pay includes salary, bonus, stock awards, long-term incentive payouts, and realized options

Figure 2.9:  Growth in Earnings of Wage and Salary Workers and CEO Compensation, 1965–​2019

talent is distributed according to a power law distribution in America, for example, but not in Germany or Japan, where CEO pay does not similarly follow a power law distribution. Economists have sought to reconcile the enormous runup in compensation of the highest-​paid segments of the workforce with the marginal product theory of wages. These are often driven by assumptions, formalized in models, rather than by evidence used to test a theory. For example, one economist claims that “a more natural interpretation [of the high compensation levels paid to top executives] is that the market for talent has driven a meaningful portion of the increase in pay at the top.”122 Similarly, another argues that differences in talent account for a large share of the accumulation of income growth at the top. He explains the high compensation for CEOs of big American companies by arguing that “changes in technology have allowed a small number of highly educated and exceptionally talented individuals to command superstar incomes in ways that were not possible a generation ago.” Technology allows them to “leverage their talents across global markets.”123 Likewise, he reasons, among the top 1% more generally, “It is natural to suspect that similar forces are at work.”124

 

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Other economists have attempted to build similar models based on assumptions. One economist sought to explain the steep gradient in top-​end incomes in the United States.125 He asked how much high top-​end income reflects entrepreneurship or “ideas”—​“Schumpeterian rents”—​as opposed to the political rent-​seeking I have emphasized. The author observes that incomes for the top 1% follow a power law distribution and notes that “exponential growth that occurs for an exponentially distributed amount of time leads to a Pareto distribution.”126 A related article looks at smaller, closely held businesses that are registered as pass-​through companies (S corporations and partnerships) where business profits are taxed at lower personal income rates—​and assumes them to be the products of entrepreneurship.127 Some, of course, are, but some simply were converted from other types of companies (such as C corporations) in order to take advantage of a change in tax law. In this model, people are exponentially distributed across age, experience, or talent, and income rises exponentially with age, experience, or talent. Some pass-​through companies do reflect innovations such as a new technology, but the author uses an extremely broad definition of innovation that allows a new organization chart for a law office or a new financial instrument to count as innovation. This model certainly can account for the Schumpeterian “creative destruction” of ideas as new technologies supersede older ones, and the early-​mover rents that the innovator can collect. But it overlooks power law distributions of returns by rent protection through such methods as the suppression of rivals by giant platform companies, creation of a new tax shelter, or beneficial tax advantages for a particular organization form won through lobbying.128 Indeed, given that the authors find that wage and salary income growth at the top follows a pattern similar to that of the owners of pass-​through businesses—​a fact their theory cannot account for—​a politically based theory of rent extraction would fit the trends better than a theory based on entrepreneurship and innovation. The expanding number of pass-​through companies beginning in 1986 under Reagan has much more to do with the tax advantages conferred on them by the 1986 tax reform (and the 2017 Trump tax bill) than with a burst of creative energy in the economy.129 Arguments explaining the power law distribution of incomes by imagining that talent is also distributed as a power law rest on an ideological premise that market forces, not power differences, drive income inequality. But the evidence does not support this assumption. Research shows that the distribution of power among boards, shareholders, and executives determines CEO pay at least as much as does the skill of the CEO. For example, research shows that the higher the difference between the CEO’s pay in an American company and that of the other senior executives, the lower on average is the value and profitability of the firm.130 As the Economic Policy Institute has shown, the enormous increase in CEO compensation relative to

 



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average employees of their firm has not been accompanied by an equivalent increase in productivity.131 One study found that US firms that provided higher incentive pay to their CEOs realized lower than median shareholder returns over a 10-​year period, whereas firms that paid their CEOs less outperformed their sectors.132 According to another, luck enters into CEO compensation approximately as much as does ability.133 For example, oil company CEOs tended to receive pay increases when world oil prices rose independently of their own actions, but rarely fell when world oil prices fell. Firms with more active monitoring by shareholders of CEO pay tended to pay less for luck relative to total pay, supporting the view that CEOs can set their own pay when governance mechanisms are ineffective. The fact that top-​end income follows a Pareto curve structure also helps explain why cuts to the top marginal rate of personal income tax fail to increase productive investment. As Paul Krugman explains, the effect of such tax cuts is like an increase in top executives’ wages without any additional effort on their part.134 This helps explain why the doctrine that top-​end tax cuts will reward productive effort is empirically faulty. To the extent that the fractal-​like accumulation of income gains at successively higher slices of the highest end of the distribution is the result of power inequalities rather than entrepreneurial talent or zeal, top-​end tax cuts reward rent-​seeking over productive effort. Further cutting against conjectures that the global scale of operations justifies the pay packages of American CEOs is the fact that equally globalized firms in Germany and other countries manage to get by despite paying their CEOs several times less. Table 2.1 compares the median compensation levels (including base pay and all bonus and incentive pay) for the CEOs of the 12 biggest—​by market capitalization—​firms in the United States, United Kingdom, and Germany, as of 2018. The median figure for the American CEOs was more than four times that of their British and German counterparts. The market capitalization and

Table 2.1: Top 12 Companies by Country, Median Values (2018) Country

CEO pay (millions US$)

Market cap (billions US$

Firm size (thousands of full-​time employees)

Net earnings (billions US$)

Germany

4.43

68.75

179.07

4.05

UK

4.04

75.55

68.50

4.76

US

18.10

311.14

174.25

24.80

Source: Capital IQ. I am indebted to Zhiye Yang for invaluable research assistance in collecting this data, and to the reference staff at the Harvard Business School Baker Library.

 

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net earnings of the American companies were larger, but the American firms were, on average, slightly smaller in size than the German firms. Likewise there is no correlation between variation in CEO compensation and variation in market capitalization, firm size, or net earnings within or across countries. Bebchuk, Cremers, and Peyer found that the average “CEO pay slice” (i.e., the CEO’s share of the total compensation paid to the top five executives of the firm) was about 35% among a large sample of US firms.135 My own comparison of CEO pay in the top dozen companies in the United States, United Kingdom, and Germany (based on market capitalization) indicates that although the US CEOs receive far higher compensation packages than those in the other countries, there is no relationship among CEO compensation, market capitalization, firm size, or net earnings. (See Table 2.1.) The median CEO compensation package—​including base pay and all bonus and incentive pay—​of the largest 12 companies in the United States is about four times as large as that a person in the same position in Germany and the United Kingdom. However, the median firm size for the top US firms is slightly smaller than that of the top dozen German firms. There is also no correlation between variation in CEO compensation and variation in market capitalization, firm size, or net earnings within or across countries. Evidently, factors specific to firms and to countries’ formal and informal norms governing top-​end compensation govern compensation practices. Moreover, pay differentials in US corporations are much wider than in peer countries, as Table 2.2 shows. The average compensation of top-​ranked American executives is almost 3.5 times higher than the average of the next most highly paid; in the United Kingdom, the ratio is 2.16, and for Germany it is 1.21. This pattern supports the argument that nonmarket, socially based power rankings are shaping compensation to a greater extent in the United States than in an economy where rent extraction is more limited, such as Germany. Table 2.2: Pay differentials among Top Executives of Corporations, United States, United Kingdom, and Germany Ratios of pay levels

US

UK

Germany

Top-​ranked to 2nd

3.47

2.16

1.43

2nd to 3rd

1.35

1.69

1.21

3rd to 4th

1.84

1.22

1.11

4th to 5th

2.00

1.21

1.31

Source: Capital IQ.

 



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Given the wide variation in patterns of CEO pay across different countries, it is hard to accept the argument that differences in talent account for the relationship between CEO pay, firm size, and talent. A comparative perspective is a corrective to the assumption that an American CEO receiving several tens of millions per year must, by definition, be worth it. Rents can be generated not only by innovative technological advances and by sudden shifts in market prices for natural resources, but also by government protection from competition and government help in suppressing other claims on profits, such as those from labor or society. In nonmarket societies, hierarchically ranked social power also affects the returns to status. If social power is exercised in such a way as to protect rent streams by restricting market competition and pressure from labor, as in a feudal or slave-​owning society, the distribution of those rents may follow a power law. Slaveholders, plantation owners, landed gentry, and other noncapitalist property owners are spared having to compete for incomes realized from the labor of others. Where political influence or other factors protect rent streams from competition, the beneficiaries of the rents can distribute them extremely unequally. In South Africa under apartheid and the antebellum US South, White property owners externalized many of the costs of maintaining a coercive but highly profitable system of rent extraction while appropriating the lion’s share of the rents.136 In such a society, the accidents of birth, not the supply of and demand for talent, dictate a person’s circumstances. Well-​aligned property rights in the absence of a free market for labor perpetuated extreme inequality in incomes and wealth. The profits of slaveowners on antebellum southern plantations, secure both in their property rights and in their freedom from a competitive market for labor, illustrate the point. A typical southern slavery-​era plantation owner received a gross revenue of $6,320; expenses were $1,000; the overseer cost $300; profit was $5,020.137 In the 1760s, a rich plantation in South Carolina paid an overseer £200–​£300 per year plus the right to work his own slaves for a share of the profit.138 The owner thus received an income that was easily 10 times greater than that of the overseer, and the slaves received less than nothing for their labor. Notwithstanding the fact that slaveholders complained about how expensive it was to maintain the slavery system, the plantation economy would not have been profitable under a system of free labor—​a major reason, in fact, for the Civil War.139 The state paid the costs of maintaining social hierarchy, including police power. A well-​documented example of the way the distribution of rents can follow a hierarchy of social rank is the distribution of prize money from captured ships at the turn of the 18th century, the Spanish frigates Thetis and Santa Brigada, captured by four British warships in 1799. For each crew, the prize money was

 

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Table 2.3: Distribution of Prize Money in the British Navy, 1799 (total prize: £163,000) Rank

Number of individuals in rank

Allotted share per category

Share per person

Captain

1

25%

Lieutenant

4

12.5%

£5,091

Warrant officers

8

12.5%

£2,468

25

12.5%

£791

25%

£182

Midshipmen All others

225

£40,730

Source: Brian Lavery, Nelson’s Navy: The Ships, Men, and Organisation, 1793–​1815 (London: Conway Maritime Press, 2012).

divided as shown in Table 2.3. (By contrast, it is said that the pirates of the Caribbean in the early 18th century divided their plunder equally among all members of the crew.) This follows a power law distribution. The captain received eight times more than the next rank of officers, 16 times more than the rank below them, 52 times more than each midshipman, and 224 times more than the rest of the crew. The captain was appointed to his command through some combination of merit, connections, seniority, and luck. Once appointed, shares of captured prize money were allocated according to strict navy rules. The rigid social hierarchy governing this distribution was enforced by the Crown. Chance and skill determined the outcome of an action, but the British class system, maintained and reinforced by the state, determined the distribution of the rents. Similar disproportions in pay occur outside feudal and slave settings as well. The compensation packages of American university presidents have little correlation either with their ability to raise revenues or with the quality of the university.140 Some low-​and middle-​rank institutions pay their presidents far more than do higher-​ranked schools. Universities, while not profit-​making, nonetheless compete intensely for talent among their students, faculty, and top administrators and for the prestige of their institutions in the public eye. One way boards can satisfy themselves that they are doing so is by offering the president an extremely generous compensation package. However, the compensation of top administrators has risen at a much faster pace than that of other employees.141 Competition to pay the president more than rivals drives a wasteful spending spiral that widens pay differences among the employees of the institution and results in the elimination of programs, benefits cuts, and freezes in pay for faculty and staff.

 



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Much the same dynamic applies to other nonprofit organizations as well. Consistent with the bargaining power argument, weak oversight allows top executives in large nonprofit organizations to award themselves extremely high compensation packages bearing no relationship to their talents as administrators or fundraisers.142 Indeed, across a sample of over 10,000 nonprofit organizations, one study has found a negative correlation between the ratio of CEO pay to that of the average employee and the performance of the organization, as measured by indicators such as the ratio of program expenses to total expenses, the ratio of program expenses to total assets, the ratio of net fundraising to total fundraising, and the average revenues per employee. Likewise the probability that the CEO is granted a valuable perquisite (specifically, the right to use first-​class or charter air travel) is negatively correlated with organizational performance.143 Within Ashley N. Newton’s sample, it was the educational institutions where the differential between the chief executive and the average employee was highest. Whereas the median ratio of CEO compensation to the pay of an employee was 8.06 across the entire sample, in the education sector the ratio was 14.17. American university presidents, like senior officers in Nelson’s navy, slaveholders in the antebellum South, and leaders atop other hierarchies of social power and prestige organized around a mixture of coercive and normative power are in a position to command rents for their organization and to redistribute them disproportionately to themselves. The degree to which chance rather than merit dictates rewards is hard to measure precisely. But in a ranked hierarchy of social power and prestige, those at the top can award themselves outsize compensation so long as they can persuade others that by virtue of birth, political connections, or perceived merit, they warrant a share of the spoils many times higher than that of the next-​ranking executive. Therefore, although corporate compensation boards nominally decide the pay of CEOs, and university boards of trustees set the pay of presidents, the belief that the chosen candidate is far more talented than anyone comparable and therefore merits the exceptional pay package can have the same result as the conviction that some are born superior by virtue of blood or race. The models of economists who observe the Pareto-​like distribution of CEO pay and try to ascribe it to a theory of talent are succumbing to the Euripides fallacy. Twenty-​five hundred years ago, the Greek playwright Euripides also noted our tendency to attribute greater merit to those who possess great wealth. A character in one of his plays observes that “prosperity carries with it this error too, a reputation for bravery; for we think the prosperous man a master of all knowledge.”144 We succumb to the Euripides fallacy when we attribute exceptional talent to people because we observe that they are successful. These instances suggest a more general formulation: in a hierarchically ordered society, where power at the top is granted by birth, prestige, or connections

 

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or is seized by force, rather than won through free and fair competition, the wage returns to power differentials will follow a power law distribution. It is tempting, therefore, for those who benefit to justify their good fortune by attributing it to ability and effort and to try to persuade those around them to do so as well. Therefore we cannot accept pure market explanations for top-​end pay levels in the United States. Large companies do exercise market power and political influence. Where firms can use ties to government to restrict competition from rivals and avoid pressure from labor or the public, they can use their market power to extract rents. A bank that counts on government protection to bail it out in case of failure can assume higher levels of risk. A firm that gains an early advantage—​a Schumpeterian rent stream—​through technological advantage may subsequently turn to the government to preserve it. By joining together with other similarly situated firms and sharing a portion of their rents with political allies, firms can convert market power into the political power to protect rent streams and redistribute them to top executives and shareholders according to a power law distribution.

2.5.  Hidden Incomes Hidden incomes, that is, incomes that are not reported to the authorities, tend to widen inequality more than they narrow it. Some conservatives contend that the poor receive far more income than is reported, which may indeed be true. However, most unreported income goes to the top income earners, not the bottom. This is true as well in Russia and China, as I will discuss when we turn to those cases in Chapters 7 and 8. Hidden incomes comprise several kinds of income: income from outright criminal activity; income that is legal but unreported to the tax authorities, such as cash paid under the table; and income that falls into a gray area, as when someone fiddles with an expense report. Bribes are by definition illegal and hidden and make up a large part of hidden incomes in economies where corruption is rampant. Those who are most highly placed can command the highest bribes. Corruption therefore also tends to reinforce existing inequalities of power and status. How large a share of national income is hidden income in the United States? The most authoritative estimate examined alternative methods to calculate the sources and level of underreported income. The authors estimate that the share of unreported income is higher for those receiving higher incomes. Among the top decile, around 20% of income is unreported; among the top 1%, as much as 30% is unreported.145 One reason for this is that taxpayers in the highest income brackets receive the largest share of income in forms that themselves often

 



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go underreported, such as the income received by S corporations and other pass-​through businesses, as well as off-​share accounts that are almost completely hidden from the authorities.146 When incomes come in forms that can be cross-​ checked against employment records (such as W-​2 forms), underreporting tends to be much lower. It is the forms of income where there are no independent sources of matching information, short of an actual audit, where underreporting is much higher. These, however, are precisely the forms of income that go disproportionately to those at the top of the distribution. The scale of unreported incomes may have risen in recent decades. Certainly the share of income from nonmatchable sources—​particularly pass-​through companies—​has risen and risen most for those at the top. Second, as the number of audits conducted by the IRS has decreased in recent decades, the number of audits of high-​income taxpayers has decreased far more than those for low-​income taxpayers—​particularly the recipients of the EITC.147 This is another reason that the great majority of hidden income goes to those at the top. Although the IRS’s random audits find that low-​income individuals also underreport a larger share of their income than those with incomes in the middle range, the total amount of income the poor receive is of course far lower than the income going to those at the top. Consequently, hidden income widens inequality. Hidden income is one reason that actual inequality is much higher than the estimates supplied by the US Census Bureau. Jones and Slemrod estimate that for 2001 the gap between total and unreported income was about 16% of total tax liability. More recent estimates by IRS economists are in the same range, between 15% and 20% of total taxable income.148 If we estimate conservatively that a total of 15% of taxable income goes unreported, that the top decile receives about half of total income and that it fails to report 20% of it, then two-​thirds of all unreported income goes to the top decile (i.e., [0.2 * 0.5] /​0.15, or 0.667). Likewise they estimate that the top 1% receives about 20% of all income and evades about 30% of it. This implies that, at a minimum, 40% of all unreported income goes to the top 1% (i.e., [0.15 * 0.31] /​0.15), or 0.40). In all likelihood, these figures err on the low side.149 Politicians also have ample means to extract hidden incomes through their political power. They incur expenses in their pursuit of power, such as having to purchase their offices. Once in office, they can convert their power into yet more income—​if not for themselves, then for their network of family members and clients.150 Those with the ability to grant licenses, award contracts, allocate land use rights, control privatization, hire and promote other officials, and so on can command sizable bribes, which remain hidden unless and until they are caught and prosecuted. Two points about hidden incomes matter for explaining inequality. First, the ability to extract rents in both hidden and overt forms is hierarchically distributed: those with greater power in the marketplace and

 

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the political arena can generate higher incomes. Second, consequently, hidden incomes, like other rents, widen rather than reduce inequality. As the researchers associated with the World Inequality Database observe, the worldwide growth of hidden incomes and their skewed distribution is a major reason that household surveys do an increasingly poor job of measuring actual inequality in income distribution and that top shares must be calculated through a combination of methods, including tax returns, national accounts, and estimates of the relationship between consumption and income.151

2.6.  Spatial Inequality As the incomes and living conditions of people living in particular places grow more similar to those of the others living in the same places, differences between places are widening. Differences for individuals and households, in other words, are increasingly amplified by the effects of place. As we sort ourselves into high-​ income and low-​income places, and as mixed and middle-​income places disappear, opportunities for social and geographic mobility close. Those born into poverty tend to remain in poverty; those born in well-​off places tend to wind up in well-​off places. What reinforces those differences over time, and what erodes them? Continuing de facto racial segregation in America offers a powerful example of the forces that cause spatial differences to persist. For example, in Atlanta, street names continue to mark racial boundaries between neighborhoods, demarcating the southern from northern quadrants, long after de jure segregation was ended. Very near Emory University, Briarcliff Road becomes Moreland Avenue when it crosses south of Ponce de Leon Avenue. Likewise, Monroe Drive changes its name to Monroe Boulevard south of Ponce. The original purpose of the naming conventions—​with Ponce de Leon Avenue as one dividing line—​ was to reassure Whites buying property on the northern side of the city that they lived in a White neighborhood.152 Boundaries that mark deep differences in the matrix of power and economic relations can continue to have lasting effects well after the institutions that created them have vanished. The northern neighborhoods in Atlanta remain much whiter and more affluent than those in the southern quadrants. In earlier decades, cities pursued deliberate strategies to segregate neighborhoods in cities by race, pursued through a combination of housing, zoning, public education, public services, highway construction, and slum clearance policies. Their legacy in segregating neighborhoods through the overlapping effects of race, income, and opportunity has lasted long after segregation was formally abandoned.153

 



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Persistent spatial inequality characterizes many countries besides the United States. In Germany the six Länder of the former East Germany continue to be substantially poorer than the ten West German Länder. The median after-​tax household income in 2019 in the former East Germany was 89% of the West German states, but the pretax gap was 81%.154 The difference is slowly narrowing, but it is the redistributive mechanisms of taxation, social insurance, and social assistance that are making a bigger difference than convergence of market earnings, as Chapter 9 will show. Around the world are numerous other examples of durable socioeconomic differences set in motion by older geographic-​institutional borderlines: northern and southern Italy; coastal China and the inland provinces; the larger cities in Russia and the rest of the country. In the United States, differences in well-​ being across spatial units are widening, not narrowing. This is true whether we choose census tracts, counties, or states as our units of observation. (The larger the regional unit we choose, the lower that spatial inequality appears to be, whereas the more granular the unit, the greater the homogeneity of life circumstances within it.) If we look at an index of overall “deprivation” for each county (using criteria of education levels, poverty, income, unemployment, wealth, housing, and others), we find that differences are widening over time rather than narrowing.155 Gopal K. Singh and Mohammad Siahpush’s study, the most-​deprived decile of counties were about twice as high as the highest on the index. As material deprivation has grown, the gap in life expectancy at birth has grown between the most-​and least-​deprived counties. Nationally, life expectancy at birth fell to 76.1 years as of 2021, according to CDC figures—​a decline of almost one full year over 2020. Covid-​related deaths are the major reason for the decline, but deaths from drug overdoses, heart disease, alcohol, and suicides rose as well. For Whites, life expectancy was 76.4, but for Blacks it was 70.8.156 Examining life expectancy and other indicators of well-​being by census tract reveals tremendous disparities across communities. Looking at census tract data, average life expectancy at birth varies by 40 years: in the Adair, Oklahoma, it is 56.3; in the impoverished coal region of Logan County, West Virginia, it is 56.9. By contrast, in Charlotte, North Carolina, in the Research Triangle region, life expectancy at birth is 97.5.157 As differences in the levels of income, education, and opportunity widen across neighborhoods, their effects become mutually reinforcing, systematically locking in differences in advantage and disadvantage. More generally, as neighborhoods become more homogeneous by income and race, the inequalities between them grow wider.158 Counties with the highest percentage of people living in the same county where they were born are also those with the worst levels health and well-​being.159

 

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The stubborn persistence, and even deepening, of cross-​border differences long after barriers to convergence have fallen challenges neoclassical economic theory. Economic theory holds that, given a reasonably well-​integrated national market for capital and labor, mobile productive factors will tend to flow out of higher-​cost areas, where marginal returns are diminishing, to regions where they can command a greater marginal return. Therefore, although some initial technological or institutional shock might initially raise cross-​border differences, these would then ease as mobile factors of production—​capital and labor—​flow out of the richer region and into the poorer one. Moreover, in addition to market forces, that is, the motivation on the part of workers and investors to move to places where they can command a higher return, political forces would also press for a leveling out of differences by government.160 The long-​run tendency for regional growth differentials across and within national economies to fall has been termed “the iron law of convergence.”161 The theory recognizes that convergence works only over long time spans and can be disrupted by exogenous shocks. If national political institutions cannot enforce laws uniformly, maintain a stable currency, collect taxes, provide basic public services, invest in infrastructure, maintain a civil, judicial, and law enforcement infrastructure, offer public education, or perform other government functions in like fashion across all regions, convergence is likely to be slow at best. As a result, differences in the types and pace of economic development will grow rather than diminish. Similarly, institutional restrictions on the mobility of capital or labor reinforce cross-​regional inequality. Where labor is kept in bondage through slavery, serfdom, servitude, or other fetters, convergence cannot occur. The US South under slavery affords a vivid example, as the preceding section showed. Douglass North’s theory of institutional equilibria suggests that low-​ level equilibrium traps can persist over long periods of time.162 Under real-​world conditions of power inequalities, convergence across unequal geographic units may not occur. Rather, gaps become greater as complementarities of skills and technologies become self-​reinforcing over time through multiplier effects. Such processes have been used to explain why some cities grow more prosperous even though the cost of living may rise to exorbitant levels, while other cities and towns decline.163 For this reason, we must pay attention to the role of spatial differences as a major component of economic inequality. We can also do this quantitatively. When we break down total inequality, we can calculate how much of it comes from differences between regions as opposed to differences within regions. We can use the same method of decomposition to determine how much of total inequality is due to differences between women and men and how much to inequality within them; likewise for racial and ethnic groups, educational groups, urban and rural populations, and so on. Once again, such exercises are accounting

 



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questions, but the answers give us clues about the deeper economic and political processes that produce them. For example, to what degree does discrimination in the labor force explain differences in the wage levels of men and women, Black and Whites, immigrants and natives? How deep are differences across states as opposed to differences between rich and poor within states? One method for answering these questions is to determine the Gini index for each of the units we are interested in—​for example, states in the United States—​multiply that by the given state’s share of the US population and by that state’s share of total national income, then calculate estimates of between-​state inequality, the shared inequality that is common to all the states, and the inequality unique to each given state. We can use the US Census Bureau American Community Survey data on household/​family income distribution, by state, to calculate the trends in the inequality within and between the states (Figure 2.10).

Shares of total inequality contributed by between-state, shared, and within-state inequality and overall Gini index 80 Percent shared

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Source: Steven Ruggles, Sarah Flood, Sophia Foster, Ronald Goeken, Jose Pacas, Megan Schouweiler and matthew Sobek IPUMS USA: Version 11.0 [dataset]. Minneapolis MN: IPUMS, 2021 data from the US Census Bureau American Community Survey data on household/family income distribution, by state

Figure 2.10:  Gini Decomposition The figure shows shares contributed to total inequality by mean income differences between states, the component common to them, and inequality specific to individual states. This is calculated by using the Stata 17 ginidesc command. I dropped observations with incomes lower than 1 and those with incomes coded as 9,999,999. The latter represent missing data. The data suffer from the defects of household surveys noted above, that is, underreporting and undersampling.

 

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The figure tells us several things. First, total inequality declined through 1970, then rose again. The inequality that was common to all the states rose until 1980, then began declining again. Inequality across the states in average incomes was high in the immediate postwar period, then fell substantially through the end of the 1970s as the inequality in incomes that was shared among all states rose significantly until the early 2000s. Throughout, the “within” component—​that is, the amount of total inequality that inequality specific to particular states contributed—​was well under 5%. This indicates that the changes in total inequality are driven by changes in the contributions, as inequality across the states first fell while inequality that was similar for all of them rose, then began rising again. But by far the largest amount of total inequality comes from the distribution of incomes that is alike for all states. This point suggests that the economy became more nationally oriented, less dominated by specific state or regional patterns, in the postwar period. One reason for this is the spread of manufacturing industry across the South and West.164 Compared with other large and heterogeneous countries, such as China and Russia, the fact that so much of American inequality is common to all the regions is striking. China and Russia, like many other countries, are far more heterogeneous across their regions than is the United States.165 In the United States, by contrast, capital and labor flow much more freely across states, helping to bring about convergence between them. Economist Branko Milanovic has examined a similar question in the context of global inequality. He shows that our estimates of global inequality differ considerably depending on how we measure it.166 Often we take each country’s mean income as a single figure and calculate the inequality in the distribution of those mean incomes. Alternatively, we can weight each country’s mean income by its population and then calculate cross-​national inequality. Then we find that international inequality has fallen because the mean incomes of China, India, and other populous countries have risen much faster than the mean incomes of other countries. A third method would be to treat all households in the world as if they were part of a single society. If we then knew their incomes, using household surveys and other methods, we could then estimate a figure for total global inequality and examine how it has changed over time. Milanovic has offered estimates for all three methods. He reaches a striking conclusion. Before the industrial age, most inequality was within countries—​the gap between the rich and the poor. As some countries industrialized and their average incomes rose, more and more of total inequality was between countries rather than within them. We observed wide gaps between rich and poor countries, gaps that fell when some poor countries began catching up to the rich countries. Most recently, though, as the forces of technological development

 



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and globalization have accelerated inequality within countries, we are seeing a partial return to the preindustrial pattern, where the gaps widen between the winners and losers of economic growth within countries. As more and more of total inequality is made up of within-​country inequality, the component that is common to countries once again becomes relatively larger, while the component due to cross-​country differences decreases in scale.167 As Milanovic’s famous “elephant curve” shows, the changes in the way incomes have grown since the 1980s have brought stagnation in incomes for the middle-​income groups in rich countries who have been displaced by lower-​wage workers in other countries and by automation—​cumulative income growth for them is indicated by the low rise in incomes for those at the 80th percentile. Meantime, the middle in poor countries has done well, as indicated by the high growth of those at the global median level. Meantime, the poorest of the poor in poor countries have seen very little growth, while the world’s top 1% have done very well.168 (See Figure 2.11.) Therefore, whether analyzing inequality across small-​scale spatial units such as neighborhoods, or larger-​scale units such as countries, the question is how the combination of political and economic forces affects people’s economic circumstances over time. Even when the average incomes of people in different

Lakner and Milanovic’s ‘elephant graph’: cumulative growth of real income, by ventile, world population 1988–2008 80

Cumulative income growth of percentile, 1988–2008

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Percentile group Data from Christoph Lakner and Branko Milanovic, ‘Global Income Distribution: From the Fall of the Berlin Wall to the Great Recession.’ The World Bank Economic Review 30(2): (2016), pp. 203–232.

Figure 2.11:  The “Elephant Curve” Graph of the Global Incidence of Growth

 

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places are converging, it may be at the expense of widening inequality within them. Differences among households by income are amplified by the effects of place. As high-​income and low-​income places grow apart, the gaps between them grow wider and the differences within them grow narrower. Fewer and fewer channels of social mobility open up to bring about convergence of incomes over time. People enter gated communities both literal and figurative.

 

3

The Theory of Economic Rents

3.1.  Defining Rents What are rents? Rents are the difference between the return on the use of property under conditions of perfect competition and the (higher) return obtained when competition is restricted. A monopolist who can charge a higher price for a good or service than would be possible if he or she had to compete with other, independent sellers receives a monopoly rent.1 A ferry-​boat operator who supplies the only means of crossing a river for miles up and down river can charge any toll she likes for passage. If competition were freed up, we would expect more ferry-​boat operators to enter the market, each charging a lower price, until the price charged by the last rival just barely covers the cost of the service. So long as the ferry-​boat operator has a partial monopoly, however, she has market power, and the difference between her higher price and a potential competitor’s price is her rent. Rents are wasteful from the standpoint of society. They transfer economic transactional gains from consumers to producers and sellers; they allow monopolists to inflate costs in order to charge higher prices; and they encourage the monopolist to waste resources in seeking to obtain and hold on to the monopoly.2 Economic rents are a major source of income inequality in the United States as well as in countries such as Russia and China where firms with high market power ally themselves with government to capture rents by thwarting both competition and regulation. The incomes from these rents are concentrated among owners, shareholders, and top-​level executives of the industries with the highest market power. As we have seen, the top 1% of income earners in the United States have experienced a dramatic increase in income from wages and salaries since 1970.3 Except for the top 1% and above, the American rich today—​unlike their counterparts during the Gilded Age—​receive the majority of their incomes from labor rather than from capital.4 This model of economic growth has most benefited those at the very top. I argue that this is due above all to the ability The Returns to Power. Thomas F. Remington, Oxford University Press. © Oxford University Press 2023. DOI: 10.1093/​oso/​9780197685952.003.0003

 

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of those with market power—​the power to shape prices—​to generate rents. As Chapters 7 and 8 will show in detail, similar processes drive inequality in Russia and China. Competition dissipates rents. This is the economic law explaining much of the politics discussed in this book. Rent-​seeking is pervasive and fundamental to politics, because it is often less costly to secure rents by enlisting help from government in order to thwart competition than it is to take risks through innovation or entrepreneurship.5 The ferry-​boat operator is likely to lobby against building a bridge across the river or to seek an exclusive license to ferry passengers. A recent real-​world case in point was the campaign by the billionaire owner of a privately owned toll bridge connecting Detroit and Windsor, Ontario—​the only way to cross the river—​who spent $33 million sponsoring a referendum to block a proposal by Canada to build a public bridge. That public bridge of course would have cut into his profit. (In the event, his efforts failed.)6 Property rights protections in the absence of free competition encourage rent-​seeking. Economists consider rent-​seeking a deadweight loss to society because the effort put into obtaining and protecting rents expends resources that could otherwise be used more productively. On the other hand, rent-​seeking can be highly rewarding to the policymakers who are on the receiving end of gifts, campaign contributions, bribes, opportunities for future employment, and other benefits. Rents also feed the armies of lobbyists who are intermediaries between rent-​ seekers and their targets. Crucially for the purpose of this book, rents have strong distributive effects: generally, they deepen inequality because they convert the power advantages of those able to claim rents into material advantages. In short, they generate the returns to power. In the perfectly competitive market of classical economic theory, productive factors are paid at the level of their marginal product, that is, the market value of a marginal unit of their contribution. In a competitive labor market, an employer pays a worker a wage equal to the marginal value of his or her labor; any more than that, and the firm would not be competitive; any less, and the worker will leave to work for a firm that pays the market wage. Capital is likewise rewarded according to its marginal product. Restrictions on the supply of labor drive up wages beyond their marginal value. The same applies to limits on the supply of capital: the monopolist can charge above-​market prices, which produce rents. The problem is that real-​world economies diverge substantially from the idealized classical model. Unless we recognize how limiting are the conditions under which the model applies, we fail to understand what in fact drives the returns to capital and labor. Economists used to write about how labor unions extracted rents by limiting the supply of labor and therefore raising the price of labor. If the firm was protected from competition by government regulation (as was the case for some US industries from the mid-​1930s to the mid-​1970s), firms collected rents that

 



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they could share between workers and employers.7 Today economists acknowledge that labor is frequently paid well below the value of its marginal product as a result of growing power of firms in labor markets (labor monopsony power)8 and political efforts to weaken the collective bargaining power of labor.9 Meantime, the returns to the owners of capital have risen substantially. Economists debate the degree to which firms exercise market power and collect rents.10 Although classifications of the sources of rents vary, there are three basic types: resource rents, innovation rents, and administrative rents. All three yield above-​competitive gains to the owners of an asset. In practice, resource, innovation, and administrative rents are not always distinct. Rents initially generated from innovation or possession of natural resources can be sustained by seeking administrative protection from competition. The owners may push for weaker enforcement of antitrust law or exemption from laws protecting public health and safety. Resource rents are the price of a natural resource where the supply is limited by the fact that it is fixed in a specific place, creating scarcity relative to demand. Once the resource has been extracted and sold, that rent becomes part of the price of the good along with the costs of production and distribution. The simplest way to measure the rent is to subtract the cost of production from the sale price.11 If the price of oil suddenly rises, for example, the owners receive a windfall profit through no effort of their own. If the price falls as a result of a shift in demand or the availability of an acceptable substitute, the owners lose the rents. The size of resource rents can also be affected by the cost of production. Advances in production technologies may make extraction from remote fields practicable; then it is innovation rather than resources themselves that yield new rents. Likewise, if the owner of a field holds a monopoly through an administratively granted right, the profits combine administrative and resource rents. Innovation rents are the profits realized as the result of an innovation that reduces production costs through greater efficiency or that improves on existing technologies. As I noted in the previous chapter, these are sometimes called Schumpeterian rents because Joseph Schumpeter cited entrepreneurial effort to seek profits through innovation as the reason for the constant churning of a market economy, where firms continuously arise and fail. Entrepreneurs work to achieve dominance in a market niche by driving out rivals, only to be driven out themselves by a new harder-​working or more ingenious upstart. It was in the spirit of Schumpeterian rents that venture capitalist Peter Thiel declared “competition is for losers.”12 The spread of information-​communications technologies has enabled the production and distribution of digital services on a vast global scale at virtually no cost, yielding extremely high returns very quickly thanks to the positive externalities of connected networks, both network externalities and economies of scale (i.e., the ability to distribute infinite amounts of content at virtually no cost).13

 

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Innovation rents are encouraged by intellectual property protection laws. How much protection from competition they should afford is a matter of policy choice. We debate how long an inventor should be allowed to maintain exclusive patent rights or a copyright holder a copyright. We recognize that a patent or copyright grants a monopoly, and justify it on the grounds that the opportunity to acquire innovation rents drives the search for higher productivity. This in turn benefits society as a whole.14 Even though innovation rents often contribute to higher aggregate productivity, they can increase inequality, at least temporarily, by creating new relative scarcities of capital or skilled labor. But, as with natural resource rents, innovators may want to lock in their competitive edge. The desire to preserve a flow of rents often motivates innovators to invest in efforts to influence government to fend off potential rivals. In the case of the digital technology giants such as Google, Amazon, and Facebook, these efforts take multiple forms: lobbying against antitrust action by the government; predatory pricing for services offered by rivals in their own platforms; appropriation of rivals’ technologies; cross-​leveraging market advantages across markets; vertical integration; and data-​driven methods for retaining customers.15 A company with substantial political power can push to prolong a lucrative patent or copyright.16 Administrative rents bring us face-​to-​face with politics. These are the rents obtained when a factor of production is sheltered from competition as a result of the action of a policy or regulation that restricts the ability of outsiders to enter the market. IP protection in the form of patents and copyrights, tariffs, and import licenses is an example. We agree to protect the intellectual property rights of an inventor or author in order to encourage innovation, but we limit the length of time that patent holder or copyright owner can enjoy the benefit of these IP rights. We use administrative methods to grant rent-​yielding opportunities in other ways as well. Licensing and permitting rules that restrict the ability of non-​license holders to operate a business, exclusive rights to provide a service such as cable television or electric power to a specific region, and specially designed procurement rules that disqualify all but a select set of providers to sell their goods to the government are all examples of administratively created opportunities to extract rents by restricting competition. A conventional justification for creating such rent streams is the character of a “natural monopoly,” defined as a business where the fixed costs of establishing service are high but the marginal costs are low. That is, the initial investment in infrastructure is high, but the company can expand the scale of operations at little cost. In such cases, competition could wind up being inefficient and even harmful. Therefore, for true natural monopolies, many economists agree that in return for granting a monopoly, government should have the right to regulate prices.

 



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From roughly the mid-​1930s to the mid-​1970s, the United States maintained a regulatory regime that restricted market competition in several major sectors of the economy, including banking, railroads, trucking, airlines, electric power, and telecommunications. Regulation protected profits by raising steep obstacles to the entry of new firms, including lower-​cost foreign rivals, while restricting price increases. In the late 1970s, a policy paradigm shift occurred. Mainstream economists and policymakers, many Democrats among them, had come to agree that the benefits of government restrictions on competition in core sectors of the economy had reached their limits. High inflation and stagnant growth impelled a turn away from the regime of regulation. The protected industries had allowed levels of benefits and wages for American workers that were much higher than workers in lower-​wage economies, at the expense of relatively high prices. Innovation and efficiency suffered. Although the economic case for deregulation was widely accepted by Republicans and Democrats alike, its political strength came from its appeal to corporations interested in reducing labor power. The result was that economic liberalization was heavily skewed in favor of business. In the early 1980s, the Reagan administration focused on suppressing labor’s collective bargaining power but allowed corporations to amass market power through an unchecked wave of mergers and acquisitions. The doctrine that competition would always ultimately defeat any effort at monopoly rent extraction—​a doctrine especially propounded by neoliberal economists—​came to dominate the Reagan administration’s approach to antitrust regulation and became pervasive throughout the court system despite the weakness of factual support.17 During the era of regulation, regulatory protectionism yielded rents for the affected industries. Higher labor costs could be passed on to consumers thanks to the limits on entry by new firms. This allowed firms to accept national collective wage bargains.18 The market power of firms stemmed from regulatory protection, which sometimes was passed on to employees as higher wages.19 The trucking industry probably had the highest share of rents flowing to workers, due to the power of the Teamsters Union. One study showed that for trucking, rents were shared between managers and workers, but unequally. Between two-​ thirds and three-​quarters of the rents were distributed to Teamsters. Those wage premiums comprised as much as half of the drivers’ wages.20 However, labor union premiums in other industries were much lower. Two leading economists concluded that rent premiums to workers varied with the level of competition in the industry much more than with the level of unionization. Industries protected by trade barriers, for example, could collect rents.21 Moreover, the overall cost to the economy of labor union wage power during the era of widespread collective bargaining was slight, while the public goods contributed by unions in the form

 

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of lower turnover, higher work safety, and better social protection more than outweighed this cost.22 In most regulated industries, the level of rents claimed by labor was modest. Labor economists estimated that the small net cost to society from trade union power over wages and working conditions (perhaps equivalent to 0.3% of GDP) was more than offset by their effect in reducing labor turnover, reducing wage inequality, improving safety conditions, and, in some sectors, increasing productivity.23 When the airlines were deregulated, the relative earnings of workers in the industry fell by about 10%.24 Some of this was due to the abrogation of union contracts, but some was due as well to the recession and the higher oil prices. The decline in relative wages in the airline industry, moreover, was roughly in line with the decline in wages from the late 1970s to the late 1980s in other, nonregulated industries. It is hard to claim, therefore, that in the era of regulatory protectionism, labor—​organized labor in particular—​claimed a high share of industry rents. However, after deregulation, with the rise of market power by corporations in many industries, owners and managers changed partners, sharing rents with their political allies rather than labor. Although the monopolist’s power to raise prices creates rents, rents can also be realized by suppressing workers’ power, as in systems of forced labor. The same is true in many nominally free labor markets, as in company towns or societies with pronounced racial power hierarchies. Only in a fully competitive labor market can an individual freely choose the terms of employment. Then employers cannot extract rents by holding down wages below the competitive level, nor can organized labor force wages up by limiting the supply of labor. It is at the cost of ignoring the less visible restraints on the freedom of workers to take and leave jobs—​the social ties they have to families and neighborhoods, the sticky housing markets that leave them without options for housing or transportation to take a better job—​that we take the frictionless labor markets of theory for the reality of workers’ lives. A growing body of literature demonstrates the power of monopsony—​where employers exercise a power advantage over employees—​in contemporary American labor markets.25 Comparison of the United States with Russia and China is illuminating. One of the consistent arguments of liberals in the United States, Russia, and China has been that the freedom of workers in the labor market is an essential condition of both economic development and basic social justice. Advocates of “free labor” in the slave era fought bitterly against Southern slave-​owners, a fundamental conflict that was a principal cause of the Civil War.26 Slave owners relied on the principles of the sanctity of “property rights,” “states’ rights,” and “freedom of contract” to defend their system of coerced labor. They saw no contradiction between their ringing defense of “liberty” and their devotion to the institution of slavery in the name of property rights. In a strikingly similar way, communist leaders from the very beginning of the Soviet and Chinese

 



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revolutions employed forced labor, not only for military needs, but for the purpose of “socialist construction.” During the Russian Civil War, Trotsky devised a system of “labor armies,” arguing that however inefficient such labor was, it cost the state little or nothing.27 Stalin used gulag labor for massive construction projects at the cost of millions of prisoners’ lives. In both regimes collectivization of agriculture forced peasants to produce for the state’s needs, resulting in mass famine, as in Ukraine in the early 1930 and in China during the Great Leap Forward. Recognizing how fundamental coerced labor was to the communist regime, reform-​minded economists such as Nikolai Shmelev in Russia and Vasilii Seliunin and Wu Jinglian in China argued that a competitive market for labor was an essential condition for both economic development and basic social justice.28 An effective labor market would curb the appropriation of rents from using state power to coerce labor. Whether in the name of property rights or socialism, any system of coerced labor allows employers to extract rents by holding down wages, transferring the cost of maintaining the system to the government. To the extent that employers exercise power over the terms of employment, they can appropriate rents. From that standpoint, competitive markets for labor allow workers to receive a wage more commensurate with the marginal value of their work and permit them to exercise the freedom to choose where they will work. Therefore labor market competition expands the freedom of individuals to choose the conditions under which they will work. As I will explain in Chapter 9, the Freiburg school in Germany in the 1930s made this argument in advancing a conception of liberalism opposed to fascism, Naziism, socialism, and the cartelized economies of the 1920s and 1930s.29 The ideal of using market forces both to raise incomes and narrow inequality arises whenever politically imposed administrative controls generate rents through market power that in turn fosters political and economic inequality.

3.2.  Thought Experiments In a provocative recent article entitled “Defending the One Percent,” economist Gregory Mankiw proposed a thought experiment to illustrate the causes and consequences of economic inequality. We are to imagine a society in which all have equal incomes. Without inequality, no one demands redistributive taxes and transfers. Then an ingenious entrepreneur invents a remarkable widget, or an author writes a sensationally popular novel. Millions of people pay money to buy the widget or the book. They are out the price of the widget or book, but they are not worse off because they got value for their money. The entrepreneur or writer earns a lot of money. Incomes become unequal as a result. But some people think this is unfair, and start to demand that government tax the

 

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entrepreneur or writer and redistribute the revenues to those with less. Mankiw writes, “In my view, this thought experiment captures, in an extreme and stylized way, what has happened to US society over the past several decades.”30 But let us imagine a different thought experiment. Suppose that in a real-​world society, market forces are released after having been suppressed, and people are able to “truck, barter and exchange” for profit.31 Existing social relations will be inherited into the new setting, and those social relations will be characterized not mainly by a rough equality of condition, but by all the asymmetries of knowledge, status, and power that order societies: those of family, of administratively governed economic units, of gender, race, and ethnicity, of education and social ties, and of political structure. The market opening enables those with advantages to capitalize upon them, drawing commercial advantage from them and seeking in turn to protect those advantages—​to lock them in. The “early winners” will ally with power-​holders and maintain the benefits of exclusive access to channels of supply, production, and marketing. They will protect their rents and capitalize those rents and may trade or sell rent-​extracting opportunities. The natural condition is not the rough equality of access to the market that was assumed in the time of Adam Smith or John Locke, when classical liberalism was born. It is erroneous to suppose, as Marx did, that the great defining source of power hierarchy was class relations. But it is equally erroneous to wish away power inequalities in market relations. Market-​supporting institutions can indeed make all sides better off, but they can also benefit some more than others, or indeed leave some with no advantage at all and simply the necessity of laboring without freedom of choice over the conditions of their employment. When a society opens the door to market relations, both those with entrepreneurial skill or effort and those with good connections achieve rapid gains. They exploit openings, such as in the price differentials of raw materials between the controlled plan prices and the new market demand-​driven prices, or access to foreign currency reserves, or to real estate, or the rights to lease out state enterprise or office space in research institutes. They may run a large state enterprise, where most production is loss-​making, but some capacity can be turned to profitable sidelines, where the profits are retained privately but the losses charged to the state. They may have privileged access to credit. They may be able to hold their workforce and region hostage by threatening social instability if procurement orders or liberal credit terms are not provided. They may be able to bid on natural resource fields in a rigged auction. As in Mankiw’s thought experiment, some may also be very clever in inventing a better widget or a superior technology. Whether by entrepreneurial zeal or by taking advantage of insider connections, those who become early winners face a choice. They can invest in continuous upgrading, modernization, and expansion, or find new markets at

 



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home or abroad, or seek efficiencies in existing production processes. Or they can cultivate good relations with the political authorities, sharing a portion of their rents with the policymakers in return for administrative privileges. How much they share depends on the relative strength of their bargaining power. If they hold a trump card over the decision-​makers, they share only a very small share of their profits; if the politicians enjoy a greater advantage, they must turn over more of the proceeds, all depending on the balance of relative clout and vulnerability on each side. The relationship, however, is an alliance, rather than capture. It can be more or less symmetric, but it rests on an exchange of benefits. The politicians desire resources, material and political, and the enterprises desire access to cheap credit, orders, exclusive markets, favorable regulations, light taxes, multiple exemptions and loopholes, loan forgiveness, favorable labor regulation, and, in a closed economy, hard currency. Both sides in this alliance also face threats: the politicians may face challengers, and the enterprises may face competition as new entrants to the market succeed in outflanking them or even making their former markets obsolete. These alliances need not last forever, but they can be stable over long periods of time. Both sides benefit from finding institutional solutions to their collective dilemmas. Businesses benefit when they can pool their resources to ensure that a particular team or party of politicians remains in power, even as individual politicians die or get arrested. A programmatic, ideology-​based platform for the alliance is useful for both sides: it might be based on an ideology of national greatness, or laissez-​faire faith in markets, or the need for national champions to outcompete foreigners in overseas markets. The ideology helps the ruling politicians justify their power and their alliance with the winners of liberalization. The politicians constantly worry about the threat of popular discontent. Therefore they also strive work to change the rules for choosing leaders to reduce the chances of losing power. They may lean on cronyism to cultivate personal relations with key source of support. They may fan a cult of personality, or mobilize aggression against foreign and domestic enemies. Or they may rig the rules of elections in order to lower the risk of a defeat at the polls. The system may eventually falter, but it can also gain strength by the accumulation of mutual obligations and advantages as the ratcheting of rules that lock in the rent streams increasingly favors the insiders.

3.3.  Liberal Theory and Economic Rents American economists began to analyze rents formally during the era of regulation. Many economists had held that rents represented inefficiency in the allocation of surpluses from monopoly but not a net loss to society. However, in 1967

 

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Gordon Tullock argued that the social cost of monopoly rents extended well beyond the transfer of wealth from a consumer who pays a higher cost for a good as a result of a producer’s monopoly or a tariff imposed on a product to the seller. He pointed out that sellers also expend resources on protecting their monopoly and compared the social costs of monopoly rents to the social costs of theft. The thief transfers someone’s wealth to himself, which by itself leaves society no worse off. But the thief invests in weapons and tools, and that represents an opportunity cost to society. Likewise those defending against theft must spend resources on security. The arms race between predators and prey wastes resources that could have been used more productively elsewhere.32 Tullock’s insight is important. Many conservative economists argue that we should not be concerned about inequality from the standpoint of social welfare: the transfer of surpluses from consumers to producers is irrelevant so long as the producers use resources efficiently. For that reason many economists believe that antitrust litigation is misguided because it aims at the reallocation of resources from producers to consumers or rich to poor.33 In 1971 the influential University of Chicago economist George Stigler outlined a simple political model of rent-​seeking, which he described as a theory of economic regulation.34 He focused on firms. Firms sought favorable regulations from government, including protection from competition by rivals. They turned to government to protect their profits. The industry benefited while society lost out, but the benefits were concentrated on the particular industries whereas the costs were dispersed across society. It was far easier for politicians to assemble majorities of organized interests than majorities of dispersed consumers who in any case were largely unaware of the cost they paid for higher prices. The industry provided side-​payments to the political party that built the necessary congressional majority. “I conjecture that much of the compensation to the legislative leaders takes the form of extra-​political payments,” Stigler wrote. The more concentrated the industry, the more readily it was able to solve the collective action problem inherent in organizing to obtain an industry-​wide good. Neither political party could demand too much from industry, or otherwise industry would switch its support to the opposition party, but both parties could benefit from the material and other electoral resources that industry provided. By the late 1970s, Stigler extended the theory further by attributing the growth of government in the 20th century to “the purposeful use of public power to increase the incomes of particular groups in society,” a rational but deplorable result of the political influence of politically powerful minorities (in Stigler’s view, these included “farmers, welfare recipients, businessmen, professional men, etc.”) who voted rationally for politicians who increased their benefits at the expense of society at large.35 In their 1962 book, The Calculus of Consent, James Buchanan and Tullock provided a formal model demonstrating

 



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that majority rule tends to produce overinvestment in the public sector as winning majorities use their taxing and spending power to concentrate benefits on themselves and disperse the costs.36 As the era of regulation gave way to deregulation in the late 1970s, the neoliberals and public choice theorists abandoned their earlier concern with the power of firms to influence government and instead focused their attention on the power of labor unions and interest groups representing the poor and racial and ethnic minorities to obtain redistributive benefits through government taxing and spending. In effect, they worried that Democrats in office expanded spending in order to distribute benefits to their constituents; the logical policy remedy of course was to reduce government’s ability to tax and spend. Some went so far as to argue that any government intervention in economy or society was intrinsically distorting—​a source of rents for those who demanded it. Government taxing and spending should be pared to the absolute minimum; markets would also be more efficient and more fair than any choice government might make. As Chicago’s Gary Becker claimed: “It may be preferable not to regulate economic monopolies and to suffer their bad effects, rather than to regulate them and suffer the effects of political imperfections.”37 Any government effort at rectifying market failures only created still more rents. Stigler quoted Coase approvingly as observing that “if an economist delays the adoption of a bad law by one week, he has earned his lifetime salary several times over.”38 As corporate interests enlisted public choice theory for their own uses, the threat to market freedom from the market power of business corporations was forgotten, but that from organized labor was regularly attacked, as were the demands by racial and ethnic minorities for enforcement of constitutional guarantees of equal rights.39 The rent-​seeking theory initially developed by public choice scholars was now deployed by powerful organized corporate interests as ideological ammunition against government redistribution, public goods, enforcement of labor rights, and social insurance; its advocates argued that a system of secure property rights was the best bulwark against the danger of rent-​seeking by predatory public and private power-​holders. In the United States, as Nancy MacLean has brilliantly shown, this line of argument is the lineal descendant of the antebellum Southern slaveholders’ claims that economic freedom meant protection of their property rights over the enslaved. The association of absolute property rights with economic freedom has deep roots in the defense of slavery by figures such as John C. Calhoun and their latter-​day followers. Economic freedom, in this view, concerned freedom for property owners, not for labor, and certainly was considered a more fundamental social value than political equality.40 By extension, any government action that imposed a burden on property owners, such as taxation or regulation, or government-​provided public services, violated property rights. The prominent public choice theorist James

 

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Buchanan himself actively fought desegregation of public schools in Virginia, claiming that the burden on property owners to finance desegregated public education was the equivalent of theft.41 He argued that education spending should be entirely a choice by private households.42 In the context of Lockean liberalism, less tainted by the legacy of slave-​ holding, property rights referred to defending the products of a person’s labor from predation—​whether by a monarch, a warlord, or a business rival.43 Classical liberalism accepted the fundamental importance of individual freedom on the labor market, and the right of individuals to their property in labor. Lockean liberalism underpinned the emphasis that neoinstitutional economics placed on the security of property rights, to the point that the term “institutions” itself became synonymous with property rights protection rather than with the provision of public goods or the extension of political equality. Scholars found evidence that societies with better-​protected property rights induced higher levels of productive investment, thereby contributing to greater prosperity and growth.44 The need to establish secure property rights became axiomatic for the architects of market transitions around the world. Missing from their models was a consideration of the social conditions necessary for property rights to produce the benefits of prosperity. Ronald Coase summed up the case for the priority of property rights in his famous theorem. So long as property rights were sufficiently secure, Coase proposed, and the costs of transactions were sufficiently low, any arbitrary initial distribution of property would eventually lead to a Pareto-​efficient distribution of assets as property owners bargained with one another for ownership and control rights until each had found a use for the assets that maximized their long-​term value.45 (Pareto efficiency means that at least someone is made better off, and no one is worse off.) Such an outcome, of course, required a regime in which property rights and contracts were enforced impartially. Coase recognized the importance of the “so long as” condition. In real-​world environments the costs of acquiring adequate information about an asset before reaching an agreement and of enforcing a contract after it was struck are rarely costless. Therefore, the theorem applies only under the condition of full equality of market power among market actors in frictionless exchange. Ignoring the “if ” condition in Coase’s theorem waves away most real-​world settings, in which not only informational asymmetries, but also power inequalities that allow those with greater power to impose terms on their counterparties in both product and labor markets. Coase based this theorem on his work on the nature of the firm. Recognizing that under some circumstances, high transaction costs made contractual relations among market actors relatively costly, firms chose to internalize some relationships in order to reduce the costs of transactions between managers and

 



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workers. Further, for Coase, a firm was nothing more than a bundle of contracts among its owners, managers, and employees. More generally, neoliberal and public choice theories were founded on the methodological premise of individual agency and rational self-​interest. Social aggregates were conceptualized as contractual relationships among individuals.46 The individual was the abstract embodiment of an entire class of equally positioned individuals, each maximizing individual utility.47 So too “the firm” in these models stood for the class of all firms. Among the laissez-​faire liberals, this methodological premise readily slipped into the conviction that society is in fact no more than the aggregate of the contracts formed by free and equal individuals, otherwise possessing no immanent quality. This theory diverged considerably from Locke’s theory of the social contract, in which individuals were attached to one another through their common interest in protecting the fruits of their labor.48 Locke held that it is labor that creates the right of property, not the other way around. Therefore natural law set a limit on how much the laborer could extract from the earth. Margaret Thatcher was closer to Chicago than to Locke when she claimed that “there’s no such thing as society. There are individual men and women and there are families. And no government can do anything except through people, and people must look after themselves first. It is our duty to look after ourselves and then, also, to look after our neighbors.”49 The conception of the corporation as no more than an aggregate of contracts underlay the idea that arose in the 1970s that to reduce opportunities for managers to shirk in their obligations to owners, managers should be given incentives to maximize the value of the shares held by the owners but not to serve any other purposes. This doctrine came to be called the shareholder value theory of the firm.50 It reflected a narrow view of a firm’s responsibility and certainly was not a value-​neutral implication of universal economic laws. It also reflects a characteristically American outlook, one at odds with other versions of liberal capitalism. Contemporary German corporate governance law, for example, explicitly requires firm managers to consider the effects of their actions on the larger society, specifically, “employees, managers, customers, suppliers, and the general public.”51 The shareholder value doctrine also ignored the centuries-​old concept of commonly held property (“the commons”), whose legal status originated with the Charter of the Forest signed by King Henry III in 1217 as a complement to the Magna Carta.52 It also ignored instances of shared governance of common-​pool resources around the world today, such as fishing grounds that are used jointly but independently by a fixed set of users, who exercise common responsibility for governing the resource.53 Indeed, Eleanor Ostrom, who analyzed the governance of common-​pool resources around the world, argued that it made sense to treat the modern corporation as a common-​ pool resource. That understanding of the corporation is embodied in the legal

 

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charter of contemporary benefit corporations, which have spread throughout the United States since 2010.54 From a philosophical standpoint, then, the shareholder value theory actually upends liberalism itself by denying that corporate managers hold any responsibility to society.55 The axiom that insecure property rights foster wasteful rent-​seeking rather than productive investment predominated among the economists who designed the market transitions in the Soviet bloc. In the Russian case, the reformers overlooked the strong theoretical and empirical evidence—​including the simple models of rational political behavior laid out by the public choice school and the Chicago economists—​that the new owners of privatized enterprises were likely to prefer a regime that protected their market advantages while preventing the entry of rivals. Research demonstrated that this was precisely the outcome in postcommunist states where market reform stalled.56 It was not the initial “losers” from market reform—​industrial workers and urban consumers—​who were the greatest threat to liberalization, but rather the “early winners” who most profited from arbitrage opportunities in the market and used their privileged positions to shut out competitors. Similarly, the reform theorists overlooked the experience of establishing market economies in post–​World War II Europe. Their assumptions blinded them to the fact that, given the enormous adjustment costs of entering a globally competitive marketplace, it was far more advantageous for those who acquired ownership and control rights to use their market power to ally with those in government who could protect their streams of rents. They had no incentive to create a rule-​of-​law regime so long as they could use their power to extract rents and to share a portion of them with their allies in government. Although the early winners phenomenon was particularly visible in the postcommunist sphere, it characterized market transitions around the world where the World Bank, IMF, US Treasury Department, consultancies, and academic experts offered blueprints for reform. As William Lewis, founding director of the McKinsey Global Institute, observed, “The Washington Consensus about good economic policy profoundly underestimated the importance of a level playing field for competition.”57 Lewis’s experience with the McKinsey Global Institute, which had found instance after instance around the world where the most profitable firms were also the least productive—​a consequence of those firms ties to corrupt and inefficient governments—​taught him that a regime of property rights is secondary to the dismantling of barriers to open competition in product and labor markets. In the case of Poland, the reformers did explicitly demand an opening of the markets to global competition in order to force domestic producers to restructure rather than to seek government protection.58 This was not the strategy followed in Russia, however. As we will see in the case study of Russia, reformers invariably deferred any consideration of

 



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opening markets to competition until the problem of property rights had been solved. Liberal theories of market reform in Russia assumed with little evidence that the spread of private property relations would generate pressure for governmental institutions protecting property rights, political representation, and the rule of law more generally.59 Then when privatization failed to deliver the desired results, the reformers blamed “poor institutions.” In the one case, good institutions were considered to be the product of incentives unleashed by privatization; in the other, bad institutions were blamed for corruption and rent-​seeking. In fact, institutional development is always contingent on the distribution of political resources and interests.60 China’s rapid growth in the absence of secure property rights poses a puzzle for property rights fundamentalists.61 Some observers point out that China grants property rights selectively, to favored firms under cronyistic arrangements.62 No one firm has a good reason to exert effort to press the government for a universal property rights protection regime, so each prefers the second-​best alternative of exchanging favors with friendly government officials. Such arrangements may be less than optimal from the standpoint of society but afford both government officials and businesses sufficient rewards to prefer it to a regime of impersonal rules and open competition.63 Economic growth under such circumstances is clearly compatible with a regime lacking secure universal property rights.

3.4.  The Demise of Antitrust Market liberalization and deregulation in the United States quickly resulted in the reconsolidation of industries and the growth of market power by dominant firms. The decline in the enforcement of antitrust law is one reason. The political environment in which the economy has operated helps explain how this happened. Concurrent with the lifting of price controls and entry barriers in regulated industries—​the late 1970s and early 1980s—​an academic school of thought opposed to government antitrust regulation gained a powerful foothold among policymakers. This theory corresponded to the political interests of conservative Republican Party politicians and their business allies. When the Reagan administration took office, it was guided by an ideological antipathy to most forms of government regulation, including antitrust. One result was a deliberate, sustained weakening of antitrust enforcement.64 The anti-​antitrust doctrine is generally associated with University of Chicago economists such as Milton Friedman and George Stigler and their counterparts in legal scholarship, Robert Bork and Richard Epstein. The Chicago school was deeply suspicious of government efforts to regulate business activity. They held

 

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that no matter how damaging monopoly power might be to social welfare, any effort by government to curb it would produce even worse effects. The older Progressive view that only government power could curb the concentrated influence of trusts, monopolies and cartels was thought to be outdated and pernicious, having left, in Robert Bork’s words, “an oligopoly phobia” whose influence lingered among government lawyers far too long. Bork applied some of the economic theory developed by Chicago economists to the problem of the enforcement of antitrust law.65 Bork agreed that antitrust should be used to block cartels and price fixing and other forms of horizontal integration if they could be demonstrated to harm consumer welfare. But the only criterion he considered legitimate in enforcing antitrust was consumer welfare, which he defined exclusively in terms of productive efficiency. His position was that bigger firms were bigger, generally speaking, because they were more efficient, reasoning that if they were not efficient, other firms would seize on the opportunity to enter the market and challenge their dominance. This position was axiomatic rather than empirical: if monopolists raised prices too much above market-​clearing prices, demand would decline or nimbler rivals would cut into their profit margin. He argued that only productive efficiency could justify antitrust scrutiny of proposed mergers, not “allocative efficiency.” That is, the fact that a monopolist could transfer income from consumers to producers was not in itself socially harmful, since producers were thought of as simply another class of consumers. Such transfers did not necessarily represent a deadweight loss to social welfare.66 Moreover, although horizontal mergers in highly concentrated industries should be scrutinized closely for their potentially anticompetitive effects, vertical integration was, in general, to be tolerated for its efficiency-​ enhancing potential. Only overt price-​fixing in the market should be regarded as ipso facto illegal, and only then when there was clear evidence of overt collusion. The judges, consequently, should apply the “rule of reason” in evaluating the legality of mergers and agreements among firms. Judges should establish a reasonable compromise between the public’s excessive concern over market power and an economically efficient level of concentration.67 The shareholder value theory, mentioned earlier, was consistent with the neoliberal perspective. Rather than seeking to balance the claims of multiple stakeholders—​ shareholders, customers, employees, and communities—​ the new theory held that the only legitimate purpose of the corporation was to maximize the value of company stock. This view aimed at aligning the behavior of managers with the interests of owners under the assumption that corporations were merely “legal fictions which serve as a nexus for a set of contracting relations among individuals.”68 Aligning the interests of managers with those of the owners by rewarding managers for maximizing shareholder value was to be the solution to the problem of agency loss and the appropriation of rents by

 



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managers. The danger that managers might collude with owners and politicians in sharing the rents afforded by protection from competitive pressure seems not to have been considered. The new doctrine was officially adopted by the Business Roundtable in 1997, but it had begun to influence corporate behavior well before then.69 One consequence was to tie managers’ compensation more closely to the performance of the company’s stock, leading to an increasing focus on short-​term performance targets and higher stock prices.70 Another consequence of the shift in thinking was the abandonment of the idea that corporations had a moral obligation to the well-​being of their employees.71 The Chicago school position, of course, deliberately ignored the fact that corporations were also political agents.72 The postwar consensus between big business and labor around “welfare capitalism,” under which industry should “lend a helping hand to its workers” and shield them “against the vicissitudes of life” (in GM chairman Alfred Sloan’s words) was formalized in the “Treaty of Detroit” of 1950.73 The Treaty of Detroit was a formal agreement negotiated with Truman administration participation between General Motors and the United Auto Workers that specified good material benefits for workers in return for union recognition of management control of production. It set the terms for many subsequent collective labor agreements in American industry. More broadly, it was a social pact between capital and labor recognizing the right of both sides to benefit from productivity growth.74 The Chicago-​based doctrines rested on purely deductive thinking, not empirical evidence. (Chicago theorists liked to sneer that “the singular of ‘data’ is ‘anecdote.’ ”) Nonetheless, the Chicago school’s theories lent academic respectability to the policy interests of big business and conservatives and found a receptive ear among moderate Democrats as well. The impact of conservative economic philosophy reached its maximum impact during Ronald Reagan’s presidency. Reagan appointed first Murray Weidenbaum, then Martin Feldstein, to chair the Council of Economic Advisors, and a prominent advocate of the Chicago school’s antiregulatory thinking, William Baxter, to head the Antitrust Division of the Department of Justice. In 1982, the year after Reagan took office, Baxter issued new guidelines significantly relaxing controls over mergers. With the new rules, as Sam Peltzman wrote, “The war against mergers was over, and Bork won.”75 Baxter also signaled his rejection of the previous antitrust doctrines by dropping the 13-​year old antitrust case against IBM. The administration began cutting funding and staffing for the Antitrust Division sharply.76 It approved a number of mergers, including in industries that had been previously deregulated.77 Moreover, as a share of all proposed mergers, the proportion that were subjected to review by the DOJ fell more than 10-​fold from 1985 to the present.78 The number of antitrust investigations undertaken by the Antitrust Division began falling precipitously under Reagan and, except for a brief surge in

 

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antimerger enforcement under Clinton, it continued until the end of the Trump administration.79 The doctrine that economic efficiency must be the sole criterion for determining whether market concentration was anticompetitive slowly and steadily expanded its influence in court rulings and federal antitrust litigation from the 1970s forward.80

3.5.  Bringing in Politics The early public choice and Chicago theorists recognized that a theory of rent-​ seeking must incorporate the interests of politicians. They therefore devised a simple but logical theory of politics. Stigler pointed out that politicians and parties had funding needs of their own. Politicians were not simply passive objects of bidding for monopoly rents, but rather were strategic agents for whom protecting the rents of those supplying them with support was politically advantageous. We might add that the greater the risk and cost of losing power, the more valuable to the politicians is the support of rent-​seekers. Moreover, extending this logic further, it follows that the politicians have an interest in facilitating collective action on the part of rent-​seekers to help them pool and channel the flow of rents. They may establish party campaign funds and political action committees, foundations and think tanks, cable broadcast channels and websites, and promote an ideology preaching the virtues of free enterprise. Therefore rents, rent-​seeking, and rent-​sharing form a pattern of reciprocal action. This book argues that it is this union of rent-​seekers and their political allies that has set the United States on a trajectory fostering high inequality in the United States. It is not labor or the poor who are contributing the resources and benefiting from the policies that serve as the medium of exchange, contrary to what the public choice school asserts. It is those with the opportunities to generate high rents who are its foundation. This simple conception of exchange between politicians and rent-​seeking businesses applies to Russia and China as well. Leaders and parties in authoritarian regimes—​whether or not they use elections to fortify their claims on power—​need material resources to sustain patronage networks and provide side-​payments to key supporters. Protecting the rent streams of wealthy business interests by sheltering them from the risks of open market competition therefore serves both sides of the bargain, and leads to the suppression of both political and market competition. It is logical that politicians turn to those who have the most money to offer—​not welfare recipients and labor unions, but the business enterprises and the advocacy and funding groups they support that can aggregate the material resources demanded by politicians.81 In the United States it is little surprise that the firms with the highest potential payoffs from favorable

 



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regulations and laws spend the most on lobbying and campaign contributions.82 And that spending pays dividends. Firms that spend more on lobbying have higher returns, even controlling for earnings, assets, spending on R & D, and dividends.83 To the extent that firms can capture the regulatory process, according to one calculation, they can raise markups by 1%–​2%, equivalent to a transfer of about $400 billion from consumers to firms.84 Corporate spending on lobbying and campaigns is particularly valuable for a party or faction that is vulnerable because it lacks majority support. Such a party is likely to favor a doctrine that holds that “money is speech” and to embrace rules restricting equality of political rights.85 Firms are increasingly open about the fact that their lobbying efforts are not merely defensive moves against government interference, but are efforts to create new rents. The head of a broker-​dealer firm in Washington, DC, commented that “Washington, D.C., is a factor not accounted for by investors, but should be because an increasing portion of earnings is decided in the capitol [sic].” His firm tallies a “lobbying index” that evaluates companies according to how successfully their lobbying spending generates a profit. The firm claims that the return on its index has exceeded the increase in the S & P 500 Index by about 5% per year over a 10-​year period. Lobbying, according to this firm, is not only a hedge against the risk of unfavorable government action, but also a pursuit of “opportunities.”86 Given that firms compete with their rivals in the same industry, how do they unite to work collectively obtain regulatory privileges and tax breaks for an entire industry? Individual firms may be reluctant to pay a disproportionate share of the cost for benefits that will accrue to the whole industry.87 Corporate interests often seek much more than tax breaks and procurement contracts.88 They regularly pursue broad policy benefits affecting whole industries or shaping the very doctrines underlying antitrust enforcement and the regulation of risk. An understanding of the political environment helps explain why politicians might help firms overcome collective action problems in rent-​seeking. Whether in a democracy or dictatorship, politicians threatened by a rival faction or party may prefer a policy environment in which firms with monopoly rent streams transfer a portion of the resources to serve the government’s political interests. Whether they face electoral, factional, or bureaucratic opposition, politicians require resources to distribute to their supporters. In some political environments, such as Russia and China, elected politicians commonly must purchase their seats; in the United States, they must fund extravagantly expensive political campaigns.89 This is particularly true if they embark on an unpopular policy program that will impose losses on substantial numbers of people. It also helps explain why politicians favor wealth-​abundant sources of support rather than vote-​rich ones—​corporations, for example, rather than lower-​income voters.

 

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To the extent that money can substitute for votes, politicians have a reason to favor the interests of the wealthy and organized over the poor and dispersed. Logically, therefore, the higher the rents that are at stake, the higher the share of them that corporate interests will spend on rent-​seeking. Below, in Chapters 4 and 6, I will show that this is empirically the case: those industries in the United States that extract the highest volume of rents in the economy—​particularly the finance and healthcare sectors—​also are those that spend the most on lobbying and campaign finance. When a politician creates an institutional means to facilitate the sharing of rents between firms and politicians, the relationship between rent-​providing firms and policymakers is not capture of government by business, or government predation toward business, but rather an exchange of benefits between business and politicians. Politicians’ stake in using rent streams provided by firms to secure their power positions explains why they create institutional mechanisms such as parties, campaign funds, foundations, cause groups, and media resources that facilitate the pooling of resources by rent-​extracting firms. Collective support for a particular politician or party lets firms avoid costly competition with one another in support of a broader policy program benefiting them all. For firms, diverting a share of the administratively generated rents to their political friends is therefore a relatively low-​cost way to overcome their own collective dilemmas. Policy benefits help secure rent streams by restricting competition in product and labor markets, favorable tax regimes, and weakened claims from labor and the public to a share of profits.

3.6.  Measuring the Scale of Rents in the Economy In the preceding sections, I discussed theories of rents, rent-​seeking, and rent-​ sharing. Here I ask how large a share of the American economy they comprise. Increased rent-​seeking can help account for the fractal-​like rise of income differentials at the very top of the distribution, that is, the fact that growth rates of income are higher at each successively smaller slice of the top 1%. It helps explain why income gaps are widening among people in the same occupations with the same educational levels.90 As one economist points out, it is hard to maintain that globalization and technology change only affect English-​speaking countries, where the increases in top-​end income concentration are especially marked, and which cut taxes sharply for high-​income earners.91 Only a theory that takes policy choices into account can explain why rents have risen so much as a share of the US economy and account for the fact that countries as dissimilar as the United States, Russia, and China have such high economic inequality,

 



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whereas in a globalized, technologically advanced democracy such as Germany, inequality is much lower. How much market power do firms have? Until recently, most economists assumed that labor had market power, whereas owners by and large did not. This view was founded on two premises: first, that the relative shares of national income going to labor and to capital were roughly constant over time and, second, that labor had the ability to press for higher-​than-​market clearing wages as a result of union organization. Both assumptions have proven false. The labor share of income has declined significantly in the United States, as it has in many countries. This trend has been especially marked since 2000.92 And the rapid decline in the share of unionized workers in the labor force has belied the idea that workers have bargaining leverage over employers. During the era of regulation, roughly from the late 1930s to the late 1970s, labor unions could negotiate for contracts using standard formulas such as cost-​of-​living plus 3%.93 Therefore, as many studies showed, in more unionized industries, union members earned higher wages. However, the findings about the labor union wage premium varied widely because of differing assumptions about labor productivity. In the era of regulation, legal barriers to entry to the regulated industries allowed incumbent firms to share a portion of revenues with their employees in the form of wages and social benefits without much damage to their competitiveness. Exposure of the economy to global competition made this model increasingly unsustainable, however. As a share of GDP, imported goods and services doubled, from 5% to 10%, from 1969 to 1984.94 High production costs ate into corporate profits for those firms most exposed to global competition and fueled the movement to reduce government regulation and labor costs. Firms began eliminating auxiliary (“noncore”) units in the 1980s, above all focusing on their lowest-​wage employees, such as custodians, security guards, and clerical staff.95 Federal and state policies made union organizing far harder. Labor union membership has fallen steadily, from a high point of about 28% of the sector workforce in the 1950s to 20.1% in 1983 and 10.3% in 2019. For the private sector, the decline was even sharper: the membership rate fell from 16.8% in 1983 to 6.2% in 2019. The sharpest decline occurred in the 1980s.96 However, political as well as market forces caused the decline. It is instructive to compare labor union membership rates in the United States with those in Germany (Figure 3.1). Labor union membership has fallen in both countries since 2000, but more steeply in Germany than in the United States. This suggests the importance of changes in the structure of the economy. However, overall union membership declined significantly after unification despite the very high level of union membership in the former East Germany, which indicates that changes in the political and institutional setting also play a major role.97

 

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Trade union membership as % of all employed persons

25

US and Germany: Labor Union Membership Rates, 2000–20

Germany 20

15

US

10 2000 2005 2010 2015 Source: OECD [https://stats.oecd.org/Index.aspx?DataSetCode=TUD]

2020

Figure 3.1:  Labor Union Membership Rates, United States and Germany, 2000–​2020

If the market power of firms in the era of regulation allowed firms to share rents from restricted competition with their workers, market power today exacerbates inequality both within firms and across them. When the market power of firms is reinforced by a favorable political environment, it allows owners and managers to raise their own compensation above the level of their marginal product and lower that of labor to below it. It also allows them to join in a broader political alliance to keep taxes and spending on public goods low and to maintaining strong bargaining advantages over the workforce. To be sure, firms’ market power draws not only from political influence. It can arise from technological breakthroughs and positive network externalities as well. A comparative perspective is useful in helping to distinguish between market and nonmarket factors generating market power. If market competition is lower in some rich democracies than in others, then we would expect the rents resulting from restricted competition and higher markups (i.e., prices charged in excess of the costs of labor, capital, and other inputs, and which therefore yield rents) to be reflected in higher market power by firms. In the absence of countervailing power from labor or government, these rents would be distributed to the owners and senior managers of the firm. In fact, this is precisely what comparative studies of the United States and other OECD countries find. One model examines a sample of OECD economies, comparing those with high markups because of lower competition with those with lower markups that face higher competition. For an average

 



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country in the sample, the presence of market power increases the wealth of the richest 10% by between 12% and 21% (under reasonable assumptions about the propensity to save on the part of different income groups), while it reduces the income of the poorest 20% by between 14% and 19%. For the top decile of wealth holders, researchers estimate that between 12% and 21% of their wealth reflects the presence of market power. If firms did not have market power, such that there was perfect competition, the incomes of the bottom quintile would rise 14% to 19%.98 Other studies reach similar conclusions. One found that the EU’s active competition policy, which blocks some merger deals and deters an unknown number of others, reduces markups.99 This in turn reduces prices to consumers; a conservative estimate is that the EU competition policy saves consumers 10% per year, but some estimate that the median overcharge in cartels is as high as 30% or more. The average markup level is 12.7%, so the savings to consumers from detecting and deterring at least some mergers reduces the markup by 4.49%. In the study’s simple two-​class model of rich and poor households, the lower markups realized when competition policy is more stringently enforced reduce the portion of the incomes of rich households that comes from owning wealth, increasing the real value of their wage income while reducing the value of their financial assets. But lower markups raise the real incomes of the poorer households by a still greater amount. Likewise, growth is higher, as are employment, consumption, investment, and productivity.100 Estimates of the size of markups in the United States vary widely, from 16% over average cost, to 21%, to 35%, to as high as 61%.101 One method to determine the share of rent income in the economy as a whole is to assume that rents’ share of GDP at any given time equals GDP divided by the sum of the returns to labor—​the wage rate times total labor—​and the rate of return to capital. If the rate of return to capital equals the risk-​free rental rate of capital, and if wages are paid at the level of marginal product—​that is, under conditions of perfect competition—​then the sum of the return to capital and the return to labor will equal total national income. This assumes constant returns to scale, that is, the same relative rate of return regardless of the level of labor and capital used. If, as Raurich, Sala, and Sorolla calculate, the sum of the returns to labor and capital in the United States is approximately 74% of GDP, that would imply that markups are equivalent to 31% over cost, and their share of GDP would be 26%. Estimating the rate of return to capital and labor raises some serious methodological problems. In many countries, the United States and Germany among them, the share of national income going to labor has been declining. Some economists believe that this is due to technological change that makes it less costly for an employer to add a unit of capital relative to the cost of hiring an additional worker. The relative cost and benefit of adding or reducing capital

 

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and labor resources is usually expressed through the concept of the “elasticity of substitution of capital and labor.” The coefficient of elasticity of substitution reflects the degree to which the change in some outcome—​such as the productivity of a unit of capital—​is affected by a change in the price or productivity of some input. It is measured as the result of dividing a change in some numerator quantity by the change in a denominator quantity. If a new unit of capital is more technologically advanced than the previous one, can it produce more output with the same quantity of labor and continue to do so over time? If an increase or decrease in the output of capital requires roughly the same increase or decrease in the amount of labor used, the coefficient of elasticity of substitution equals 1. But if new capital can achieve the same output with fewer workers—​as when robots displace workers—​the elasticity of substitution is greater than 1. Over time, of course, capital wears out, so that the coefficient of elasticity over the long term may not be greater than 1. The key point is whether today, as digital technologies replace manual labor more and more, the coefficient of substitution has grown higher than 1. If so, then there is reason to think that the owners of capital are accumulating wealth more quickly than are workers. The French economist Thomas Piketty has made a strong case that this is in fact the reason that inequality has been rising.102 Underlying these apparently technical methodological debates are deeply political questions. If we assume that factors of production—​capital and labor—​ are paid more or less at the level of their marginal product, and we observe that the division of national income between capital and income shares is roughly constant over time—​as economists once took to be an axiomatic fact—​we assume that the elasticity of substitution of capital and labor is constant. But in fact, as all economists agree, labor’s share of income is falling. Capital share is probably also falling; the stock of capital per worker is rising more slowly than the profit share of national income; management costs as a share of production costs are rising; and competition is declining in product markets. Lower competition in product markets generates market power for firms—​and for some firms much more than others—​even in the absence of capital-​biased technological change. Then markups raise profits without increasing capital share commensurately, and do so even when elasticity of substitution of capital for labor is lower than 1. Stock market values rise without greater productivity or efficiency, driving higher incomes for executives (whose pay is tied to equity markets) and shareholders. In principle, both higher productivity (i.e., a rising coefficient of substitution of capital and labor) and higher market power can explain the decline in labor share and the rise in inequality. But only the market power explanation is consistent with the observed facts: increasing profits, a rising share of business costs as a percentage of profits, low interest rates, low investment, and weak productivity growth.

 



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Some economists argue that if markups are rising, we would expect to see rising inflation.103 Until 2021, however, inflation remained low except in certain markets such as healthcare. How can we reconcile higher markups with the relatively low rate of inflation over several decades? The answer lies in the fact that averages (such as the average rate of markups or the average rate of inflation) can conceal a great deal of crucial variation. Market power is far greater for some firms and some industries than others.104 Likewise inflation is much higher in some sectors than others. Some inflation is diffused across the economy generally, generating substantial rents that drive inequality in incomes. Consider the difference between retail prices for food and healthcare in the United States. Currently almost 18% of GDP is devoted to spending on healthcare, far more than in other high-​income countries. Higher prices for medical goods and services are by far the greatest driver of this increased spending (much more than increased utilization or population aging). But these higher prices often are not paid directly by the consumer. Patients with health insurance rarely know the price of an emergency room visit, an air ambulance flight, the per-​ patient cost of pharmaceutical provided through a “pharmacy benefits management” company, or medications purchased through a hospital pharmacy. These costs are spread across employers, households, and government. They reduce aggregate wages and eat up public budgets. On the other hand, the relative price of food has remained low. However, cheap food, such as the highly processed commodities sold by convenience stores, big-​ box stores, dollar stores, and fast-​food restaurants, tends to be both low in nutritional value and harmful to health. Its price is low thanks to processing methods that strip out nutrients and add ingredients such as high-​fructose corn syrup and sodium, as well as to subsidies for industrial farms producing corn and meat. Because food consumption choices are highly sensitive to prices, low-​income households consume the lowest-​quality food. In many poor neighborhoods, there are in fact no alternatives to dollar stores for groceries. The low price of cheap food conceals the fact that leads to higher rates of chronic conditions such as obesity, diabetes, and cardiovascular disease among the poorest groups of the population and among Black Americans.105 As I noted in the last chapter, the health effects of low-​quality food not only increase the probability of premature mortality, they also help explain the strong association between socioeconomic inequality and deaths from Covid-​19.106 The low prices of cheap food therefore mask the significant negative externalities imposed on the populations least able to choose higher-​quality food. Therefore low inflation in some major markets such as food drives high but hidden inflation in others, such as healthcare—​where the costs are shifted to others—​poor households, employers, insurance companies, and taxpayers. In turn, high and rising healthcare costs help explain why labor costs have grown.

 

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Over the period from 1947 through 2019, average wages rose more quickly than unit labor costs.107 However, nearly all of the increase in wages accrued to the highest-​paid workers. Wages at the 90th percentile rose at an average annual compound rate of 0.83% from 1979 to 2014, whereas wages at the 10th percentile fell on average by 0.03% per year. So while the average cost of labor rose, this was because of higher wages and more expensive benefits for higher-​paid employees.108 Averages are deeply misleading when the underlying trends affect different groups of people unequally. Market power of firms can also reflect the restricted competition of an entire industry. A number of industries in the United States—​finance, healthcare, telecommunications, agribusiness, and others—​are heavily concentrated.109 (Chapter 6 focuses on the financial sector specifically.) Firms in these industries can charge high markups, which increase profits and share values. and executives’ pay. In this way, low competition generates rents, which in turn feed inequality. Although this is an oversimplified account of the economists’ debate over the origins, size, and composition of rents, we can nonetheless draw four conclusions: markups in the economy are increasing; labor share is declining for a number of reasons; deep price distortions in the economy conceal the extent of markups; and rents exacerbate inequality. First, markups as a share of total economic activity are not only high, but rising. They may make up a quarter or more of GDP. Markups at this level signal a high level of market power on the part of some firms in some industries. Much of this market power derives from the absence of vigorous competition rather than from technological innovation. Even if the cost of fixed overhead expenses as a share of total production costs is rising, so are profits. And a growing slice of those profits is returned as compensation to salaried executives, whose pay is rising much faster than that of wage workers. Comparison between the United States and EU underscores this point. The greater intensity of competition in European markets drives down rents, increases the share of income returned to labor, and lowers the income shares at the very top. To the extent that firms accumulate market power through their influence over the regulations governing market competition, labor bargaining rights, and tax incentives, they do not need to be the most technologically advanced or efficient to capture rents. Profitability rises without corresponding increases in productivity. Second, declining labor share is caused by a combination of factors, including both market forces (skill-​biased technological change and globalization, for example), and political factors that favor employers’ bargaining power over labor. Examples include corporate-​friendly definitions of the employment relation, noncompete clauses, mandatory arbitration clauses, declining real minimum wage, legal restrictions on union rights and collective bargaining, and so on. Moreover, as the cost of healthcare insurance has risen much faster than the

 



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rate of inflation, benefits costs have pushed wages downward, especially for low-​ wage workers. This helps explain the stagnation of wages among the lower and middle segments of the distribution. The political factors pushing labor share down reflect the political paradigm shift beginning in the late 1970s. Third, political choices affecting sectors such as finance and healthcare have made it extremely difficult to measure the actual scale of markups. Subsidies for industrial agriculture, the market power of large chains of healthcare providers, government guarantees for “systemically important banks,” protected local monopolies for telecommunications firms, and similar barriers to free competition all externalize the social costs of many of the goods and services we consume. These hidden costs are offset by declining quality or rising prices of products and services or are passed on to the poor and the public through insurance and stagnant wages. The profits from high markups are returned to the top executives and owners of these companies, particularly those acquired by private-​equity funds. Meantime, rising healthcare insurance premiums put downward pressure on wages and employment of low-​wage workers. The same is true as other public goods are converted into market commodities, such as public education and public safety. Finally, rents drive up inequality. They do so because firms that command rents through market power can keep wages below the level of marginal product while raising the compensation of salaried executives—​whose pay is accounted for as a “fixed cost.” This pay is still higher to the extent that it includes stock options. When realized, these can increase an executive’s compensation many times above base salary. Therefore higher profits, which raise firms’ market value, also raise executive compensation. In an economy with a high level of rent extraction, profits are not distributed proportionately to the marginal product of labor and capital. Some are absorbed in overhead costs, which include management salaries. By driving up stock values above net replacement cost, they also raise the incomes of shareholders and managers whose compensation packages include stock bonuses and options. And a portion is transferred to policymakers who can protect corporate interests from competitive pressure and from the claims of customers, employees, and the public.

3.7.  Conclusion As the public choice school recognized, a theory of rent-​seeking must incorporate the interests of politicians. Politicians are strategic agents for whom protecting the rents of those supplying them with support is politically advantageous. To the extent they risk losing power, they value the support of rent-​seekers. However, the public choice and Chicago schools overlooked the way in which

 

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market power allied with political power. Those business interests with the most at stake from market protection in turn have provided the largest transfers to the politicians. Financial contributions to politicians are greatest from firms in the most concentrated industries in the United States. The two industries with the highest lobbying expenses are the financial industry and healthcare. And these figures only reflect federal-​level spending. The theory of rent-​sharing between firms with market power and politicians with the power to help them keep it helps explain the trend in public policy away from promoting competition. Politicians want to facilitate collective action on the part of rent-​seekers in order to pool and channel the flow of shared rents. Extending the simple model of exchange between politicians and rent-​seeking firms beyond the democratic world, we can recognize that politicians confront potential opposition in countries such as Russia and China as well. Their leaders and parties, even when they do not face electoral competition, still depend on material resources to pay back their supporters, distribute patronage, and bribe their superiors. Protecting the rent streams of wealthy business interests by shielding them from the risks of open market competition therefore serves both sides of the exchange, and results in the suppression of both political and market competition. Consequently, politicians turn to those who have the most money to offer—​not welfare recipients and labor unions, but the business enterprises and the advocacy and funding groups they support that can aggregate the material resources demanded by politicians.110 This relationship matters most for a party or faction that is vulnerable because it lacks majority support. Such a party is likely to favor a doctrine that holds that “money is speech” and to embrace rules restricting equality of political rights. Therefore, although many Democratic Party leaders in the 1980s and 1990s endorsed liberalization in order to stimulate growth, it was an increasingly conservative Republican Party that blocked their efforts to offset liberalizing policies with greater social support. Moreover, the Republicans pursued a policy agenda designed to strip away any constraint on the power of big business to protect itself from competitive pressures in both the economy and polity.

 

4

Rents and Market Reform

The preceding chapters argued that many of the economic forces that have exacerbated inequality in the last 40 years have been shaped by deliberate political choices. They were neither the unavoidable consequences of capitalism nor the impersonal forces of globalization and technological change. In the United States, as also in other countries where a major opening to market forces invited those economic interests that benefited from restricting market competition and challenges from labor and public demands to ally with those in government who had the power to deliver them policy benefits, we have repeatedly reaffirmed a policy course that has resulted in the deep divisions we now face. In the United States, the most recent wave of these choices began with the paradigm shift in the late 1970s and early 1980s. Among other things, the new course included deregulation, tax cuts, rollback of social protection and transfers, weakening of labor rights and of antitrust enforcement. Those changes, as they took hold, brought about a self-​reinforcing partnership between those corporate interests and political decision-​makers in government. Each measure paved the way to further loosening of competitive and public restraints on the power of the wealthy to extract more rents from workers, customers, and the public. That path has not been straight, but overall the pattern has been consistent. In its own way, America’s turn to deregulation and liberalization was nearly as momentous as the dismantling of central planning in Russia and China that occurred at roughly the same time. Despite many differences, in all three countries, one outcome of these reforms was to foster opportunities for rent-​seeking by the largest business corporations from increased market and political power following an initial burst of competition and entrepreneurship. In this way, the United States resembles the phenomenon of the “early winners” of liberalization familiar in the Russian case. Their market power generated rents that, in turn, fueled a significant widening of economic inequality as income growth was concentrated at the highest end of the distribution and their power over The Returns to Power. Thomas F. Remington, Oxford University Press. © Oxford University Press 2023. DOI: 10.1093/​oso/​9780197685952.003.0004

 

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taxing, spending, and labor rights kept wages down for all but those at the top. Germany presents a case where the centralized, planned, mobilization economy of the Third Reich was replaced by a system balancing multiple interests, including both economic growth and social justice. Although the system has been adjusted many times since the late 1940s, Germany is the one country of the four that has sustained a stable democracy. Let us examine more closely how this dynamic arose and unfolded in the United States over the past four decades.

4.1.  Deregulation, Competition, and Concentration Economic crisis was the proximate reason for the liberalizing reforms that began in the late 1970s and early 1980s. The price shocks caused by the OPEC oil embargo, on top of high labor costs, contributed to “stagflation,” a devastating combination of high inflation and low growth. By the end of the 1970s US consumer price inflation exceeded 13%, and GDP growth dropped below zero. A broad public consensus formed that the economy needed to stimulate growth and reduce production costs. Both Republicans and moderate Democrats were receptive to arguments that protection of major industries from competition through regulatory controls was impeding innovation. Consequently, starting in the late 1970s and continuing through the Reagan presidency, policymakers pursued deregulation. They lifted restrictions on prices, wages, and market entry in a number of industries, including trucking, electric power, telecommunications, and airlines. These reforms had an immediate impact.1 The number of new firms rose rapidly.2 For example, in the first 5 years after the 1978 Airline Deregulation Act, the number of certified airlines tripled.3 In trucking, the number of certified carriers doubled in a decade.4 The telecommunications industry saw a substantial initial burst of competition following the deregulation of 1996, which in turn prompted a series of mergers through which the number of firms declined.5 The giant telecommunications monopoly AT&T—​at its peak, the largest company in the world, with over 1 million employees—​was broken up into seven “Baby Bells.” Accompanying formal deregulation was a broad doctrinal shift among policymakers, judges, and economists that justified relaxing government regulatory restrictions on businesses more generally.6 Reinforcing the consensus for deregulation and a broader turn toward economic liberalization was the spreading belief that the United States needed to become more technologically advanced in order to compete in the global economy. Policymakers recognized that older manufacturing methods were costlier than the newer technologies being employed by firms in Europe and

 



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East Asia and that industries based on digital technology would displace many older industries. “Atari Democrats” such as Gary Hart called for reducing the Democratic Party’s reliance on workers from the old manufacturing industries for support, and instead championed the new industries arising from technological breakthroughs in information and communications.7 The economist Larry Summers argued that the economy was being fundamentally restructured by the forces of technological change, globalization, the superiority of markets over planning as mechanisms of allocation, and speed—​these were, he wrote in 2001, “the hallmarks of the new economy.”8 Democrats advocated for government investment in science, technology, and education. However, the “new Democrats” and conservative Republicans had very different conceptions of liberalization in mind. Republicans saw it from the standpoint of a market-​fundamentalist, University of Chicago–​inflected version of liberalism.9 For them, the objectives of liberalization included defeating organized labor’s bargaining power, cutting taxes, reducing regulatory protection of public health and safety, and privatizing as many public goods as possible. For that reason, when the initial burst of competition in the deregulated industries ended, and a reverse wave began and industries began to grow more concentrated again, the Reagan administration did nothing to enforce market competition. Facing declining profit margins due to higher competition, many firms in deregulated industries filed for bankruptcy or were bought out through mergers and acquisitions.10 This was true in the banking industry, airlines, trucking, pharmaceuticals, telecommunications, and others. In the airline industry, largely as the result of a series of mergers, all approved by the Reagan administration, the number of carriers fell sharply and the market share of the major airlines rose rapidly. In 1990, the top four airlines combined held a market share of 68%. By 2018, this had risen to 86%.11 As a result airline industry concentration is greater today than it was in the era of regulation. The trend is similar in the trucking industry. Initially, many small-​scale carriers entered the market, leading to price wars, falling profits, and a succession of bankruptcies and mergers.12 The pharmaceuticals industry has seen a similar trend. In 1998, the four top pharmaceuticals firms represented 56% of the sales share of the 12 largest firms; by 2011 this had risen to 70.7% as a result of mergers and acquisitions.13 Through a long series of mergers and acquisitions, all the Baby Bells were swallowed up by 2016 into AT&T.14 In industry after industry, market concentration in the United States rose while enforcement of antitrust laws weakened.15 Figures compiled by Sam Peltzman show that across a broad swath of the economy—​348 industries—​industry concentration declined in the early 1980s before rising substantially from the late 1980s (Table 4.1). These figures report the HHI, the Herfindahl-​Hirschman Index, which measures concentration

 

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Table 4.1: Mean HHI Values Year

Producer goods

Consumer goods

All

1982

735

769

747

1987

710

794

738

2002

871

1039

926

2007

861

1198

975

Note: Sometimes the values are expressed as proportions rather than percentages. The maximum value the index can take, then, is not 10,000 but 100.

by squaring the value of each firm’s market share of a particular industry, then adding the values. If the HHI for an industry is less than 1500, it is considered by the Department of Justice antitrust lawyers to be competitive. A value above 1500 would indicate a highly concentrated market. Industrial concentration rose in two-​thirds of industries after 1982, but in only half before 1982, with consumer goods industries, those most directly affecting consumer welfare, becoming much more concentrated than producer goods industries.16 Table 4.2 also indicates rising average CR4 values across 676 industries in six major sectors of the US economy between 1982 and 2012. Here the measure used is the market share held by an industry’s top four firms (CR4). Table 4.2: Increasing Market Shares of Top Four Firms in Various Sectors Sector

Number of industries

Manufacturing

Number of observations

Change in CR4 ratio

Change in payroll-​to-​ sales ratio

388

2328

.75

−.96

Retail trade

58

348

2.51

−.06

Wholesale trade

56

336

.35

−.18

Services

95

570

.73

−.35

Finance

31

124

2.07

−.74

Utilities and transportationb

48

144

1.93

−.66

a

Source: David Autor, David Dorn, Lawrence F. Katz, Christina Patterson, and John Van Reenen, “The Fall of the Labor Share and the Rise of Superstar Firms,” NBER Working Paper 23396, May 2017. a Data for 1992–​2012. b Data for 1992–​2007.

 



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Market power has become a significant part of corporate value. For example, Tobin’s Q—​which measures the ratio between companies’ market value and their net worth in replacement terms—​has risen. Many economists regard Tobin’s Q as a valid measure of market power.17 The theory behind the measure is that in a fully competitive market, shareholders are compensated for risk by the expectation of a sufficient future stream of profits. In a competitive marketplace, if Tobin’s Q for a firm stays above 1 for a long time, competitors should be able to enter the market and capture a share of the available profits. However, Tobin’s Q for nonfinancial American corporations overall has been well above 1 for most of the period since the early 1980s; it has tracked corporate profits rather than productivity. The increase in profitability has not been driven by an increase in productivity.18 Instead, it has produced an enormous increase in rent extraction by owners and managers of firms.19 A strong indication that corporations are extracting rents through market power is the decoupling of profitability from productivity. In an economy where firms exercise market power, profits are likely to reflect not greater efficiency or innovation but rather the ability to prevent competition from cutting into profits. In a fully competitive market, producers cannot charge markups above marginal cost. Open entry into and out of the marketplace means that profits are realized through gains in efficiency or innovation. For that reason, economists think of profits as a measure of productivity at the firm level, just as they believe wages are set at the rate of the value of a marginal unit of labor to revenue. Market power, however, allows firms to extract rents in several ways, apart from raising prices above the competitive level. They may be able to reduce costs by shifting risk to taxpayers or reducing borrowing costs (e.g., by obtaining government guarantees). If they have market power vis-​à-​vis labor, they can set wages below marginal product. As Louis Brandeis observed as early as 1913, higher efficiency normally yields higher net earnings. But we cannot assume that higher earnings are a reflection of higher efficiency: they may result from market power.20 Therefore when we see a tendency for firm profits to grow while productivity falls, we can infer that firms possess market power and are using it to extract rents. This has been the case in the United States following the liberalization of the late 1970s and early 1980s. It is still more pronounced in economies such as Russia and China. For example, Figures 4.1 and 4.2 indicate that the profit rate for business—​in this case, nonfinancial business corporations—​has risen significantly since the late 1970s, while the growth rate of total factor productivity has slowly declined. Total factor productivity refers to the part of output growth that is not explained by adding more units of capital and labor; it is often interpreted as the ability to make better use of existing technology. When we break out capital and labor productivity separately, we find that output per unit of capital has declined,

 

Profitability and productivity have increasingly diverged, especially since the late 1970s, by quarter, 1947–2019 7-quarter moving average with quadratic fitted lines added 6

.12

.1

4

Productivity growth

.08

2

.06

0

.04

TFP change

Corporate profit per unit of value added

Profit rate

–2

.02

–4 1950q1

1960q1

1970q1

1980q1

1990q1

2000q1

2010q1

2020q1

Source: TFP: San Francisco Federal Reserve: Utilization-adjusted quarterly-TFP series for the U.S. Business Sector John G. Fernald, A Quarterly, Utilization-Adjusted Series on Total Factor Productivity. FRBSF Working Paper 2012–19 (updated March 2014). [https: www.frbsf.org/economic-research/indicators-data/total-factor-productivity-tfp/] Profits: FRED St. Louis: After-tax profit per unit of real gross value added of nonfinancial corporate business. A466RD3Q052SBEA [https://fred.stlouisfed.org/series/A466RD3Q052SBEA]

Figure 4.1:  Productivity and Profitability, 1948–​2019

Capital and labor productivity and hourly wages 80 Output per unit of capital

60 100

Hourly wage, 95th percentile 40 Output per hour of labor

50

Median wage

20

Hourly wage, 10th percentile 0 1940 1960 1980 2000 Source: BLS multifactor productivity series [https: www.bls.gov/mfp/] EPI Wage data library [https: www.epi.org/data/#?subject=wage-percentiles]

Figure 4.2:  Capital and Labor Productivity and Wages, 1948–​2019

0 2020

Hourly wages, $

Output per unit [2012 = 100]

120

 



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Before 1976, the share of corporate profits in GDP fell while investment as a share of GDP rose 20 Investment

Percent of GDP

15

10 Corporate profits

5 1940

1950

1960

1970

1980

Source: FRED St. Louis, After-tax corporate profits, domestic industries as share of GDP Gross private domestic investment as share of GDP [https://fred.stlouisfed.org]

Figure 4.3:  Corporate Profits and Investment as Share of GDP, 1948–​78

whereas that of labor has risen. However, all the gains have gone to the very top percentiles of the income distribution, as Figure 4.2 indicates. Similarly, after the late 1970s the relationship between investment and profits as shares of GDP shifted. Before the late 1970s, profit as a share of GDP was slowly declining, whereas that of investment was rising. After the late 1970s, the trends were reversed. Profits as a share of GDP began rising, whereas investment declined (Figures 4.3 and 4.4). Empirical studies of mergers and acquisitions find that they raise wage inequality as a result of layoffs among lower-​paid employees. Ma, Ouimet, and Simintzi report that after merger and acquisitions, workers employed in jobs with a high routine component are let go and that median hourly wages for the remaining workers rise. The gap between the most highly paid and lowest-​paid workers’ wages also rises by 11%.21 According to another study, after a leveraged buyout, employment falls in the first 2 years by 17% and by 23% after an acquisition.22 Meantime, top management benefits substantially from mergers. A study of mergers in the banking industry found that for CEOs who stay on, compensation rises significantly, particularly as a result of bonuses. On average, their long-​term compensation rose $310,000 after a merger.23 CEOs who complete merger and acquisition deals receive significant bonuses; the larger the deal, the

 

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The Returns to Power Since 1975, the share of corporate profits in GDP has risen while investment as a share of GDP has fallen 20 Investment

Percent of GDP

15

10 Corporate profits

5 1980

1990

2000

2010

2020

Source: FRED St. Louis, After-tax corporate profits, domestic industries as share of GDP Gross private domestic investment as share of GDP [https://fred.stlouisfed.org]

Figure 4.4:  Corporate Profits and Investment as Share of GDP, 1979–​2019

larger the bonus.24 Although managerial performance is not related to the size of the bonuses, CEOs with more power vis-​à-​vis their boards of directors (e.g., if they are on the nominating committee) also receive larger bonuses. However, in such cases, the deal is associated with lower stock returns.25 Thus as mergers have resulted in higher concentration, they have reduced employment among lower-​skill workers, raised inequality, and increased the compensation of top managers. A careful review of the evidence on concentration, competition, and antitrust in the United States by legal scholar Carl Shapiro draws three principal conclusions. Competition overall is declining in some markets, but rising in others; we cannot directly infer levels of competition from broad indexes of market concentration; and in some cases, higher efficiency is the cause for the accumulation of market share and profits. However, there is clear evidence of higher barriers to entry for new firms and of higher rents to firms in some heavily concentrated industries, such as finance, insurance, healthcare, and information. This suggests that firms protected from competition are generating “incumbency rents.” Stronger antitrust enforcement would help to curb market power and encourage competition, and thereby reduce some of the forces contributing to high inequality. To be sure, Shapiro warns, antitrust alone is insufficient to solve deeper problems such as the corruption of the political system by corporate

 



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power or high inequality. For these problems, other political and policy measures are needed.26 As we will see in Chapters 7 and 8, the decoupling of profitability from productivity as a consequence of market power is characteristic of many sectors of the Russian and Chinese economies as well, with similar consequences for the higher growth of income and wealth at the top of the distribution.

4.2.  Tax Cuts Cutting marginal tax rates for personal and capital income formed a major part of the liberalization and deregulation movement and were intended to encourage productive investment.27 Even before Reagan took office, legislation in 1978 had reduced marginal tax rates on personal income, lowered the top rate for corporate income tax, and raised the capital gains exclusion. Then as soon as Ronald Reagan assumed the presidency, he launched a series of sweeping tax cuts, beginning with reducing and eventually repealing the windfall tax on crude oil, imposed in 1980 to offset the effect of the decontrol of oil prices.28 Reagan’s major tax bill of 1981 substantially reduced the top tax rate on personal income, greatly expanded the use of individual retirement accounts (IRAs), and accelerated depreciation allowances for business. The comprehensive Tax Reform Act of 1986, intended to be revenue neutral, further lowered corporate income tax rates and marginal personal income tax rates, but sought to minimize revenue loss by repealing the investment tax credit and other deductions for individuals and businesses.29 A major feature of the Reagan tax reform of 1986 was to reduce taxes on capital income. In addition to lowering the top marginal rate on corporate income, the law also created a favorable tax regime for S corporations. S corporations are one form of “pass-​through” company, in which income from the business is taxed as personal income, thus avoiding taxes on corporate earnings. The result is generally a significant tax savings. S corporations also enjoy the other advantages of C corporations—​whose income is taxable—​that is, limited liability, unlimited life spans, and the right to transfer ownership freely.30 The use of the S corporation form reflects business response to the tax advantages it offers rather than to any spurt of innovation or entrepreneurship. In the first year following the passage of the 1986 tax law, the number of S corporation tax returns filed jumped 36.5%.31 Then after the tax bill of 1993 raised the top marginal personal income tax rate above the top corporate tax rate, the use of S corporations slowed. In the years from 1979 to 1993—​spanning the period immediately before and after the adoption of the 1986 Tax Reform Act—​ investment as a share of GDP fell by almost four percentage points, from 20.55%

 

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The Returns to Power US: rate of entry and exit of business establishments, 1979–2019

As percentage of all establishments

16

14 Entry rate 12

10

Exit rate

8 1980

1990

2000

2010

2020

Source: US Census Bureau, Business Dynamics Statistics [https://www.census.gov/data/datasets/time-series/econ/bds/bds-datasets.html]

Figure 4.5:  Business Entry and Exit Rates, 1979–​2019

to 16.125%. Nonetheless, the S corporation grew in popularity. From 22% of all corporate returns filed in 1985, by the early 1990s they reached half of the total and, by 2019, over 70%.32 Figure 4.5 shows that tax cuts did not spur a burst of new business activity. Investment, creation of new establishments, and net job creation did not increase. In fact, the entry of new businesses has fallen since the late 1970s, as has the rate of exits. Business dynamism has declined, meaning that there is less movement of capital out of and into new businesses. Figure 4.6 shows that the rate of net new job creation slowed substantially throughout the 1980s as well. The trend line across business cycles shows that the liberalizing policies of tax cuts and reduced regulation did not in fact lead to a higher rate of job growth. Tax and regulatory cuts did, however, produce rapid growth of high-​end incomes. This trend is reflected in IRS reports on the tax returns from high-​ income taxpayers. The reports indicate that between 1996 and 2016, for tax units reporting more than $200,000 in annual fiscal income, a substantial amount of income shifted from wage and salary income from a business or profession to pass-​through company income. In 1996, about 46% of returns reported income from S corporations and partnerships, but that income totaled only 36% of all reported income. In 2016, only 20% of returns were from pass-​through companies, but they represented 34% of all income.33 Meantime, 26% of returns

 



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Rate of creation of new jobs less loss of existing jobs, 1977–2014 10

As percentage of all jobs

Net job creation rate 5

0

–5 1980

1990

2000

2010

2020

Source: US Census Bureau, Business Dynamics Statistics [https://www.census.gov/data/datasets/time-series/econ/bds/bds-datasets.html]

Figure 4.6:  Net Creation of New Jobs, 1979–​2019

reported ordinary business and professional income in 1996, representing 10% of total income. In 2016 20% of returns reported wage and salary income, but it comprised only 6.6% of total income.34 More and more of the income from the highest-​income taxpayers came from pass-​through companies. And more and more tax returns came from the highest-​income taxpayers. In 1977, taxpayers reporting incomes of at least $200,000 comprised 0.078% of all returns; in 2016 they were 1.3% of the total; by 2016, they were 4.6% of all returns. The consumer price index went up about 50% between 1996 and 2016, but the number of taxpayers with incomes above $200,000 rose 3.5 times. The number of returns in this category has risen far faster than have returns in lower-​income groups. There were 11,000 of them who owed no income tax in 2016; in fact, 39 of them claimed that they were owed money from the government.35 As a larger proportion of the $200,000 and above group derived their income from pass-​through companies, those whose incomes came from employment in larger business firms diminished as a proportion of the total. In 1996, such returns (in current $) constituted 1.3% of all returns. In 2016, they were 4.6% of all returns. (And just 0.078% in 1977.) This category expanded considerably. Although prices went up about 50% between 1996 and 2016, the number of tax units filing with incomes of at least 200,000 rose 3.5 times. The IRS data for 2016—​the latest data available—​indicates that the number of returns with adjusted gross income above an (inflation adjusted) threshold

 

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of $200,000 has risen many times faster than lower income categories: the average annual rate of growth for high-​income returns was 6.6% from 1977 to 2016, as opposed to 1.4% for all returns. They now comprise 4.6% of all returns. Nearly all are subject to US income tax but over 11,000 of them owed no income tax and 39 were owed money by the government. Income from pass-​through companies is now the second-​largest source of income for such taxpayers, exceeding realized capital gains.36 Starting in the late 1970s, as with so many other changes favorable to business interests, a number of states began allowing yet another form of pass-​through corporate entity, the “limited liability corporation.” This combined the tax advantages of a pass-​through business with the limited-​liability protection of a C Corporation and the absence of an upper limit on the number of owners.37 These became very popular after the IRS approved their use in 1993 and came to overshadow S Corporations as vehicles for incorporating businesses. They also allowed the owners to remain anonymous, facilitating illegal activity. Currently, the great majority of new companies are registered as LLCs. While most are legitimate, some operate so as to shelter money as shell corporations, launder the illegal proceeds of criminal activity, and purchase real estate and other assets out of the sight of the authorities. The shift of many companies to a pass-​through status is one reason that the total tax revenues from businesses have fallen as a share of total revenues (from 11.8% in 2010 to 7.8% in 2019). The greater use of S corporations and other pass-​through forms, such as partnerships, is a major reason business has lightened its tax burden over time. The owners of small legal, medical, dental, insurance, investment, accounting, professional services, and other firms have benefited greatly, as have the owners of other S corporations such as automobile dealerships.38 The use of the pass-​through business legal form explains why 16% of those in the top 1% of income earners come from the FIRE sector—​finance, insurance and real estate—​while another 12% come from the ranks of physicians and dentists. By contrast, individuals from the information-​communications technology sector make up only 5% of those in the top 1%.39 Contrary to the view of those economists who believe that innovation, entrepreneurship, and talent are the main drivers of rising income at the top, therefore, it was the reform of the tax code that allowed business income to be taxed as personal income that had the greatest effect in raising top-​end incomes.40 Those owners of pass-​through businesses working in sectors protected by legal and regulatory privilege—​especially finance and healthcare—​have therefore been able to enter the top 1% and top 0.1% at especially high rates. Consider the composition of the top 1% of income earners in the United States. A group of economists linked the top 1% of income earners to the firms they own. They found that most top-​share income is not taxed as labor income,

 



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but as profits from pass-​through businesses.41 The authors make the assumption that three-​quarters of the income from pass-​through company profits should properly be attributed to human capital, rather than financial or physical capital. Breaking down the industries to which the S corporations owned by the top 0.1% income group belonged, they found that the highest profits in 2014 were realized in management of companies and enterprises; other financial investment firms; automobile dealers; other professional and technical services; and oil and gas extraction.42 Applying their definition of labor income, the economists calculated that 69% of the top 1% of income earners own pass-​through companies and constitute a much larger share of the top group than do executives in large firms. They claim that 53% of the income of the top 1% is primarily returns to human capital, which they define loosely to include professional skills as well as personal networks, reputations, and “rent-​extraction ability.”43 But this is surely stretching the concept of human capital beyond any reasonable limit. If lobbying power, corruption, and cronyism are treated as human capital, then human capital has no useful meaning. By their definition of human capital, it is certainly reasonably to attribute the growth of incomes of the top 1% to human capital, particularly since the reforms of the tax code in 1986 and later allowed high-​income individuals to disguise personal income as business profits. By the same logic, the cronyism and corruption in the relationships of top executives of Russian and Chinese economies with government officials must also be treated as elements of human capital. It is telling that the owners of automobile dealerships constitute the third largest group among the owners of S corporations ranking in the top 0.1%. As a large literature has shown, automobile dealers’ high incomes come not from any particular skill set but from raw political power. Unlike some other rent-​ rich industries that we have considered, such as healthcare and finance, the retail market for cars in the United States is regulated at the state level, where dealers’ associations exercise substantial lobbying influence. Despite universal agreement among economists of every political persuasion that prohibiting direct sales to consumers by manufacturers is anticompetitive and harmful to consumer welfare, every state in the United States now has adopted regulations of the franchise operations of automobile dealers to protect dealers from this threat. There are several reasons for the dealers’ success: they are well organized and relatively small in number, they concentrate the benefits of their rent-​seeking while they diffuse the costs broadly across all consumers, and they are more strongly motivated to protect their rents than are the automobile manufacturers to oppose them. They are located in every state, unlike car manufacturers. They also produce a substantial share of state sales tax revenue (one estimate is that states receive as much as 20% of sales taxes from auto dealers)44 and employment. The

 

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result is that they have been successful in fighting legislation that would permit direct sales from manufacturers to customers. This generates a significant transfer of income from consumers to auto dealers, amounting to as much as 8%–​9% of the cost of each car sold. It is implausible, therefore, that the high incomes of automobile dealers represent a return on human capital in any meaningful sense. Rather, their incomes reflect rents from the power exercised through the political system to strangle competition.45 Although the lower marginal tax rates did not spur higher productivity, investment, or growth, they did contribute to a deepening of the federal budget deficit. Partly as a result, Reagan’s successors, Presidents George H. W. Bush and Bill Clinton, pressed for and signed several tax changes that raised income, payroll, and excise taxes slightly while further lowering the capital gains tax rate and creating a new class of tax-​deferred retirement savings accounts. More significantly, President George W. Bush won two further rounds of major tax cuts in the 2000s, again lowering the top rate on the personal income tax, repealing the estate tax, reducing the tax rate on dividends, and further reducing the top rate on capital gains. Some of these cuts were to expire in 10 years, on the calculation that Congress would not risk the political cost of allowing them to expire. The total cost of the 2001 and 2003 tax cuts was approximately $4.6 trillion over a 10-​year period, and the cuts were much higher for higher-​income taxpayers, although these were to take effect later than those for lower-​income brackets.46 The effect of these measures, once again, was a significant reduction in the tax burden on higher-​income taxpayers and an enormous increase in the federal deficit. The average tax rate on the top 0.01% income bracket fell from 60% in 1945 to 24.2% in 1990. The very highest segments benefited from the tax cuts most of all. After 1995, the average tax rate on the top 0.01% was even lower than for the top 0.1%.47 By the time President Obama took office, the highest marginal rate had fallen from over 90% in the 1940s and 1950s to 35%, and the top rate on capital gains had fallen from 25% to 15%. This meant that the average tax—​total federal tax as a percentage of income—​had fallen for the richest individuals since the late 1970s, and more for each successively higher income segment (lower, for example, for the top .01% than the top 1%). (See Figure 4.7.) The regressive nature of state and local sales and excise taxes make the relative tax burden for lower-​ income households still heavier. On average across the 50 states, the effective rate for state and local taxes is 11.4% on the bottom quintile of taxpayers but only 7.4% for the top 1%.48 Contrary to the Republican premise that lowering personal and business taxes would stimulate investment and productivity, there was no measurable

 



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Average taxes paid as percentage of income, by income group .5

Average share of income paid in taxes

Top 1% .4

.3

.2

Upper 40%

Bottom 50%

.1

0 1920 1940 1960 1980 2000 2020 Source: Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, “Distributional National Accounts: Methods and Estimates for the United States. Data Appendix,” November 10, 2017 [http://gabriel-zucman.eu/usdina/] The upper 40% refers to those with incomes from the median to the 90th percentile for each year

Figure 4.7:  Average Total Tax as Share of Income, by Income Group, 1913–​2016

effect on either. However, the tax cuts led to a significant rise in the concentration of both pretax and post-​tax income among the highest income segments.49 Similarly, research on the effects of state-​level reductions in tax rates on corporate income has also found that on average, a one-​percentage-​point cut in the corporate tax rate increases the share of income for the top 1% of income earners by 0.9 percentage points over a three-​year period. Noting that the share of income going to the top 1% rose by 6.1 percentage points from 1990 to 2010, a tax cut of half a percentage point on corporate income would explain 7.4% of the increase in the income gains of the top 1% over that period. The effect works by reducing the amount of income taken in the form of salary and increasing capital income. Such cuts do not affect incomes for those under $200,000 per year, for whom it is not possible to shift taxable income from salary to capital, but those receiving more than $200,000 realize a 3.5% increase in adjusted gross income.50 Moreover, corporate tax cuts do not lead to higher capital investment. Rigorous recent research has found that across a set of 18 OECD countries, major tax cuts for the rich over the last 50 years had no beneficial effect in boosting economic growth and no effect in reducing unemployment. However, they consistently resulted in higher incomes for the top 1%, an effect that grew over time as the income gains compounded.51

 

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Tax cuts for corporate interests reached an apogee under President Trump, whose 2017 tax bill cost the Treasury around $1.9 trillion over 10 years. The bill was larded with exemptions for special interests, including the real estate industry, beer importers and brewers, automobile dealers, and many others.52 The private equity (PE) industry spent heavily and successfully to preserve the carried interest tax loophole. Cruise ship companies can avoid paying US income taxes by incorporating overseas. The corporate income tax rate was cut from 35% to 21% and exempted large multinational companies from taxes on profits earned overseas, both provisions that big business had lobbied for.53 High-​income taxpayers were given a lower marginal top rate (39.6% down to 37%) which can be reduced further if they qualify for a lower tax rate for pass-​through businesses.54 Taxpayers who receive at least $1 million won a tax cut of $37 billion for 2019.55 The short period for consideration of the bill—​ 50 days—​meant that its sponsors prevented Democrats and the public from scrutinizing provisions of the bill but allowed influential Republican members of the House and Senate to add last-​minute provisions favoring their corporate supporters.56 Under Trump’s tax bill, the highest-​income segments received the largest percentage cut. The highest marginal rate on personal income (24% for those incomes above $85,000) is higher than the corporate rate (21% for all brackets). This means that taxes on labor are higher than taxes on income from capital. Although the tax cuts for individuals are due to expire in 2026, those for corporations will not. The tax rate on income for pass-​through companies, such as S corporations, will fall. Again, as with the Bush tax cuts, there is no evidence that the tax cuts have stimulated investment, productivity, and growth. However, the bill has significantly increased the federal deficit as a result of reduced revenues.57 Like the tax cuts under Reagan and Bush, the Trump tax cuts that made significant reductions in the tax liabilities of corporations and high-​income individuals did not stimulate broad-​based economic growth. But they did accelerate income growth at the top and stagnation of incomes at the bottom.58 Privileged regulatory treatment for the wealthy has spread among the states as well. States have long varied in the degree of regulatory strictness applied toward corporations, banks, insurance companies, and legal instruments such as trusts. Recently, several states have come to play an outsized role as tax havens for the extremely wealthy by permitting novel legal arrangements that conceal the ownership of assets from scrutiny and allow their owners to avoid taxation. The disclosures of some of these methods in the Pandora Papers (an enormous collection of records about offshore wealth obtained by an international consortium of journalists) reveal ways this is done in a state such as Wyoming. An individual seeking to conceal assets creates a trust to hold them. The trust

 



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is managed by a private firm, often one nominally owned by a family member. The assets themselves are then owned by another company that the trust owns; the latter company in turn can own any number of holding companies. Multiple layers of nominal ownership make it extremely difficult for the authorities to trace the source of the wealth, let alone to tax it. The Wyoming state legislators urging the legislation claimed that easing regulatory restrictions on trusts would generate new revenue for the state, offsetting its dependence on the rise and fall of oil prices. The reality, however, has been that although tens of billions of dollars have now acquired legal addresses in Wyoming, little productive investment in the state has followed, nor has the state benefited from higher tax revenues. Republicans in the legislature have blocked any effort to tax the profits of the firms creating the trusts.59 Over and over, the claim that tax cuts for the rich will spur productive investment, leading to an increase in employment and higher wages at the lower end of the distribution, has proven to be false. Yet the corporate conservative alliance that has dominated policymaking in the United States continues to espouse it and to act on it. The message is echoed by conservative media outlets and think tanks as justification for policies that generate sizable streams of rent incomes for the most privileged segments of the society.60 Upton Sinclair’s observation applies: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

4.3.  Relaxation of Antitrust Enforcement The Chicago school’s theories about the harms of government regulation of antitrust law, labor rights, and environmental, health, and safety restrictions—​a philosophy often termed neoliberalism—​lent academic respectability to the policy interests of big business and conservatives. Even before Ronald Reagan was elected president in 1980, antiregulatory thinking became mainstream among economists and policymakers. As early as 1968, newly elected President Nixon appointed George Stigler, a prominent University of Chicago economist, to head a conservatively oriented commission on competition policy. The commission issued a report vigorously advocating a much-​reduced level of enforcement of antitrust against mergers and firms with oligopoly power, although fully supporting actions against price fixing.61 President Ford appointed University of Chicago president Edward Levi as attorney general in 1975. And although as president, Jimmy Carter supported vigorous antitrust enforcement, he regularly attacked excessive government regulation of business and proudly relaxed government restrictions on pricing and entry in multiple industries, such as trucking, airlines, railroads, banking, and communication.

 

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As Chapter 3 showed, Chicago-​inspired neoliberalism came to take over the enforcement of antitrust law by federal and state courts. The doctrine that economic efficiency must be the sole criterion for determining whether market concentration was anticompetitive slowly and steadily expanded its influence in court rulings and federal antitrust litigation from the 1970s forward (Figure 4.8).62 Chicago-​school advocates commonly claim that it was the power of their ideas that triumphed over the ideologically driven and misguided thinking of progressives in the federal antitrust agencies, courts, and law schools. In fact, as a recent article points out, those academic theories spread because they “coincided with the interests of big business,” which “coopted and promoted Chicago school thinking as a useful tool to advance its interest.”63 Meantime, although declining antitrust enforcement benefited the largest business corporations, it did not in fact generate higher growth, productivity, or social well-​being. Instead, it reinforced market power on the part of dominant business firms. For example, a careful study of merger activity in the United States finds that the number of large-​scale mergers (of at least $1 million) has averaged close to 10,000 per year over the past decade. Only 15% of so of these were large enough to require notification of the Justice Department or Federal Trade Commission, and only 3.1% triggered a request from the government for additional information. The government declared some type of opposition to 301 of them, but only 33 resulted in a Department of Justice: Antitrust Investigations Initiated, by Type 1970–2019 400

Number of actions

300

Sherman Act-restraint of trade

200

Clayton Act-mergers

100

Sherman Act-monopoly 0 1970 1980 1990 2000 2010 Source: Department of Justice [https://www.justice.gov/atr/division-operations]

Figure 4.8:  DOJ Antitrust Investigations, by Type, 1970–​2019

2020

 



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formal complaint by the government.64 Compared with the 1980s, government policy shifted significantly toward a more permissive stance toward mergers.65 The gain in market power on the part of the largest firms allowed them to raise markups and profits without necessarily improving productivity. Their increased power in the marketplace and over government also widened income inequality. Although higher concentration does not always and necessarily reflect lower competition, it often does, particularly when anticompetitive behavior on the part of large firms goes unchecked. The accumulating evidence of flagrant abuses of market dominance on the part of large tech firms vividly illustrates the point.66 In the last 2 years, however, there has been a decided shift in public opinion and federal policy regarding antitrust enforcement, particularly concerning the large digital platform companies, Amazon, Google, Facebook, and Apple.67 In the final months of the Trump administration, the Federal Trade Commission and the Antitrust Division of the Justice Department, joined by a large number of the states, filed cases against those companies. In October 2020, Democrats in the US House of Representatives issued a 450-​page report demanding significant sharpening of antitrust enforcement against Big Tech following a 15-​month investigation.68 In June 2021, the US House of Representatives took up consideration of six bills aimed at limiting the large digital technology companies.69 The Biden administration named Lina Khan to chair the Federal Trade Commission. Khan is a leading figure in the new wave of academic thought opposed to the conservative trends of antitrust law of the past 40 years. Her confirmation passed on a vote of 69 to 28 in the Senate, indicating substantial Republican support. These actions reflect a certain convergence between right and left in seeking to rein in the digital giants. On the left, rising concern over growing economic inequality and concentrated market power is heightened by the rapid growth of the digital platform companies’ dominance in multiple markets, including search, e-​commerce, and social media.70 The right is exercised over the technology companies’ content moderation decisions, which radical right-​wing populists consider censorship of their speech. However, the sharp shift in public opinion toward favoring stricter government regulation of the digital platform companies has brought about a convergence of views among policymakers that the existing antitrust law should be applied more stringently to check abuses of Big Tech.

4.4.  Labor Rights The Reagan presidency launched a determined and successful effort to weaken organized labor.71 President Reagan’s dismissal of all the striking federal air traffic

 

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controllers at once in 1981 sent a powerful signal of support to private sector employers intent on breaking strikes by refusing to negotiate. Thereafter there were no significant labor actions on the part of federal employees, and union strength in the private sector declined precipitously.72 Firms began to roll back wage and social protection gains made by unions in previous rounds of collective bargaining and to fight union organizing drives.73 Employers increasingly introduced noncompete clauses into contracts, not only in high-​technology industries, but frequently in low-​wage industries as well, such as fast food, warehouse packing, and retail chains.74 Similarly, many firms that have outsourced jobs to staffing agencies agree with those agencies not to hire the temporary workers. Many companies that work through franchise operations prohibit employees from moving from one company franchise to another (e.g., from a Burger King owned by one franchisee to that of another).75 Over the last 30 years, employers have used illegal coercive tactics to prevent union organizing with greater frequency. During National Labor Relations Board (NLRB) election campaigns, employers resort to threats and intimidation to prevent workers from agreeing to seek collective representation. Surveys of workers regularly show that a much higher percentage of private sector workers would prefer union representation than are currently represented, so the use of intimidation tactics by employers has been successful in lowering collective bargaining.76 Employers have become far more willing to resort to illegal tactics to thwart organizing drives, such as threats of closing the workplace, cutting wages, interrogations, and infiltration of organizing committees because they know the NLRB is unlikely to intervene.77 The pressure of competition from deregulation, reinforced by the federal government’s hostility to collective bargaining rights, forced labor unions to make major concessions to employers. These included wage freezes, wage cuts, and new two-​tier contracts (i.e., new workers would be hired at lower wages and fewer benefits than incumbents).78 These concessions affected both union and nonunion members and both regulated and nonregulated industries. Cost-​of-​ living increases built into wage contracts ended. Especially important was the fact that wage negotiations at the company or even plant level began to replace industry-​wage collective bargaining.79 Union membership rates began to decline, spurred by what two economists described as “a dramatic increase in the amount and sophistication of both legal and illegal company actions designed to forestall the organization of workers, and reduced union organizing activity per nonunion worker.”80 The market power that firms had under regulation combined with the high rates of unionization and worker bargaining power resulted in the sharing of rents between managers and workers. This pattern ended as competition cut into firms’ market power in the early years of deregulation. Thereafter, however, as winners emerged and consolidated their market power, they no longer shared their rents with workers; rather, they switched partners, and began sharing

 



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rents instead with policymakers who could protect their advantaged positions through favorable tax laws, reduced antitrust enforcement, weaker labor rights, a friendly regulatory climate, and election laws equating money with speech. Since the early 1980s, economists have found, there has been a strongly negative correlation between corporate profits and workers’ wages, which is consistent with declining competition and lower bargaining power on the part of labor.81 Political pressure on labor has amplified the effects of technological change and global trade in weakening the collective voice of labor. Workers benefit both from membership in labor unions and from being represented by them. Although 10.8% of workers are union members, about 12.1% are represented by union contracts. Members receive higher wages than nonmembers—​median earnings for union members are over 20% higher than for nonmembers.82 Therefore the steady decline in labor union membership, especially in the private sector (where membership has fallen to 6%), places downward pressure on wages and increases income inequality. Low-​wage workers have also been harmed by the sliding real value of the minimum wage. The federal minimum wage is not indexed to inflation, so that until Congress and president agree on an increase in the level, price inflation continually drives it lower. Figure 4.9 shows the erosion in its value relative to inflation and to the median wage in the economy (which itself has also stagnated). Raising the minimum wage enjoys considerable public support, but powerful resistance from Republican legislators has blocked action at the federal level.83

.55 10 Federal minimum wage, constant 2018 $

.5

Federal minimum wage

8 .45 6 .4 As percent of mean wage 4

.35 Nominal value

2 1970 1980 1990 2000 Source: EPI [https://https://www.epi.org/data/#?subject=minwage/]

.3 2010

Figure 4.9:  US Federal Minimum Wage in Real Terms, 1968–​2020

2020

Federal minimum wage as percent of mean wage, Inflation-adjusted

The Federal minimum wage has lagged behind inflation and average wages

 

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Meantime, 29 states plus the District of Columbia have minimum wage levels higher than the federal threshold, and 18 plus the District have indexed their minimum wage to inflation.84 At the same time, seven states, six of them in the South, have no state minimum wage laws.85 The minimum wage affects a large share of the American workforce. Well over half of American workers are paid by the hour.86 Almost 2% of them are paid wages at or below the federal minimum of $7.25 per hour. The largest shares of low-​wage hourly workers are in the South, where they comprise as much as 4%–​5% of the labor force; most are in service jobs, and most have limited education. A disproportionate share is Black or Hispanic. A single person who works 40 hours a week, 52 weeks a year and earns a wage at the federal minimum wage level would receive $15,080 per year. The national poverty line for a single person in 2020 was $14,500. If that wage worker had to support an additional family member, her income would fall well below the poverty threshold for a two-​person family ($17,240).87 The fact that minimum wage levels vary widely across states and metropolitan areas means that, as in many other areas, the lagging level of the federal minimum wage increases economic inequality not only across income groups but also across states and localities. The concentration of low-​wage workers in particular states reinforces poverty traps. The level of the minimum wage also affects wages for workers just above the minimum level, so that when the federal level is raised, their wages tend to rise as well.88 Although the minimum wage level is not the main reason for widening wage inequality, it has become a significant contributing factor as its real value has lagged behind inflation.

4.5.  Privatization of Social Protection The rising cost of defined-​benefits pension plans and the weakened bargaining power of labor have led to a steady decline in the share of employed persons with old-​age income and healthcare protection provided through their place of employment. As with other labor market trends, this affect the employed population unequally. Lower-​wage workers have lost coverage at much higher rates. Between 1950 and 1979, the percentage of private sector workers covered by pension plans doubled. The new course reversed the trend, most sharply for younger and less-​educated workers.89 The government instead encouraged private retirement savings by making contributions to IRAs tax-​deductible. This change resulted in a significant increase in the use of IRAs.90 At the same time, the federal government has created new, market-​ based mechanisms for social protection.91 These included tax-​advantaged, employment-​ based and non-​ employment-​ based programs for retirement

 



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savings and accounts for medical expenses.92 Like other forms of private social insurance, these shifted the risk of market fluctuations and losses onto the individual and enabled those at higher incomes to accumulate substantially larger retirement portfolios. Politically, it was far easier to add private, market-​oriented forms of social insurance than it was to roll back existing programs such as Social Security and Medicare, where risks are pooled broadly. Although health insurance and pension obligations had become a significant burden on many firms by the 1970s, impeding their competitiveness, it was business itself that had undertaken these obligations as an alternative to the still more undesirable choice of giving the federal government responsibility for universal social insurance.93 To be sure, the United States adopted a limited national Social Security system in 1935, but many firms also provided defined-​ benefits pension plans and company-​run health insurance plans to ensure that their employees had adequate income retirement and could pay necessary medical expenses. The accidental nature of this system owed to the scarcity of labor during World War II. Government wage controls prevented companies from competing for labor by offering higher wages, but government exempted company contributions to health insurance plans from wage controls and made them tax-​exempt for both workers and employers.94 Both healthcare and retirement benefits coverage declined significantly following liberalization in the United States—​above all for workers at the lowest end of the wage scale. As Bloom and Freeman put it, “The ‘private welfare system’ associated with employers weakened significantly in the 1980s.”95 (See Tables 4.3–​4.6.) The tables show that while there has been a decline in access to employer-​ provided social protection, it is those at the lowest end of the wage scale who have lost out the most; it is they who have been squeezed most by the increasing costs of employee contributions to retirement and particularly healthcare plans as employers have switched from defined-​benefit to defined-​contribution plans, and costs to the employees for contributing to company-​based health insurance

Table 4.3: Percentage of Workers with Pension Coverage, by Type of Plan, 1983, 1998, and 2016 Year

Defined-​benefit only

Defined-​contribution only

Both

1983

62

12

26

1998

24

60

16

2016

17

73

10

Source: Center for Retirement Research at Boston College, from figures from Survey of Consumer Finances (US Federal Reserve).

 

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Table 4.4: Private Industry Workers with Access to Retirement Benefits by Wage Category, March 2014 Wage percentile

All retirement

Defined benefit

Defined contribution

Bottom decile

27

4

25

Bottom quartile

38

5

36

Second quartile

67

14

62

Third quartile

76

24

70

Top quartile

85

36

80

Top decile

88

37

85

Source: Bureau of Labor Statistics, “A Look at Pay at the Top, the Bottom, and In Between,” May 2015,  https://​www.bls.gov/​spotli​ght/​2015/​a-​look-​at-​pay-​at-​the-​top-​the-​bot​t om-​and-​in-​betw​een/​ home.htm.

Table 4.5: Private Industry Workers with Access to Retirement Benefits Who Participate in That Plan, by Wage Category, March 2014 Wage percentile

All retirement

Defined benefit

Defined contribution

Bottom decile

39

56

36

Bottom quartile

48

70

45

Second quartile

71

85

67

Third quartile

81

88

75

Top quartile

88

88

83

Top decile

89

86

85

Source: See Table 4.4.

plans have tripled.96 Therefore the burden of dismantling of America’s workplace-​ based system of social protection has fallen most heavily on those who are least able to compensate for it in the market economy. By 2016, according to a GAO report, 29% of American households headed by a person aged 55 and older had no retirement assets, neither savings nor a defined-​benefits plan. Another 20% had only a defined-​benefits plan to fall back on.97 To be sure, were future retirement income from Social Security and defined-​benefits plans included in the estimate of household wealth, aggregate inequality in the distribution of wealth would be lower. This, however, provides an unrealistic view of wealth, because defined-​benefits plans can be reduced or forgone entirely if a company or public employee fund undergoes bankruptcy,

 



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Table 4.6: Percentage of Private Industry Workers with Access to Healthcare Benefits, by Wage Category, March 2014 Wage percentile

Health benefits

Bottom decile

20

Bottom quartile

34

Second quartile

74

Third quartile

86

Top quartile

93

Top decile

95

Source: See Table 4.4.

and because a household lacks any ownership rights over such conditional income streams.98 Accompanying these changes has been the “fissuring” of the workplace, as economist David Weil terms it.99 Fissuring refers to three kinds of changes in the employment relationship in companies: franchising, supply chains, and subcontracting. The result is a large increase in the number of contingent workers, often with precarious relations to the principal employer. Weil estimates that from 1995 to 2005, contract workers as a share of all workers rose by 26% and the share of day laborers by 36%, while the total workforce grew 13%.100 And the growth of contingent labor force significantly weakened the claims of workers to the status and opportunities enjoyed by regular employees. The narrowing of the very definition of employment was actively pursued by big business; it is not a purely market-​driven phenomenon.101 An example of the way in which corporations attempt to shed responsibility for employees is the claim by Uber that it is not a transportation company and therefore its drivers are not employees: “Drivers’ work is outside the usual course of Uber’s business,” as Uber’s chief legal officer explained to the European Court of Justice, claiming Uber is “an information society services provider.”102 As the economy has shifted more and more to one based on the provision of services, both personal services such as healthcare as well as business and professional services, employment relations have increasingly grown contingent and job quality has worsened. Firms hire people to perform professional services on a temporary basis, avoiding a long-​term employment relationship and obligation to provide retirement or healthcare benefits. For the firm, the use of services workers makes fixed labor costs variable; for the employee, earnings and hours are unpredictable, and the work often stressful. Although for those in high-​skill

 

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service employment, compensation may be high, it is typically low for workers in manual service jobs, which are, not coincidentally, heavily female by gender composition. For many high-​and low-​wage service jobs, the quality of the job affects an employee’s level of satisfaction. Some evidence of this is seen in the remarkable disparity across industries in the quit rates of workers from their jobs in 2021 during the Covid-​19 pandemic. During that volatile year quit rates rose sharply on the part of workers in the leisure and hospitality sector, especially for those in the accommodations and food service businesses that form a major part of this sector. Workers in professional and business services also left their jobs at high rates. The uncertainty and lack of security for many in this sector may well be a factor in their high rate of leaving their jobs. To be sure, many of those voluntarily leaving their jobs do so in order to take better jobs at higher wages, but the rate at which workers in the leisure and hospitality sector left their jobs rose significantly in spring and summer 2021, and the rate of hires fell significantly. Meantime, the financial sector showed almost no change in the rate at which workers quit and were hired.103

4.6.  Market Power in Healthcare In settings where power and information asymmetries between buyers and sellers are protected by law, the presumption of two free and equal individuals, a seller and a buyer, entering into a market contractual relationship is absurdly misplaced. This point applies equally to employment relations between an employer and an employee and to the relationship between a seller and a consumer of commodities. Where there is a power asymmetry between a buyer of labor and a seller of labor, the buyer of labor is spared the necessity of paying the worker the full marginal product value of the labor. In any market where a seller or buyer has market power, he or she can use it to extract a rent. Although the monopolist’s power to raise prices—​the ferry-​boat operator is the canonical example—​rents can be realized in other ways as well. Keeping costs low by suppressing workers’ power, as in systems of forced labor, is a clear example. The same is true in many nominally free labor markets, as in company towns or societies with pronounced racial power hierarchies. Only in a fully competitive labor market can an individual freely choose the terms of employment. Then employers cannot extract rents by holding wages below the competitive level, nor can organized labor force wages up by limiting the supply of labor. It is at the cost of ignoring the less visible restraints on the freedom of workers to take and leave jobs—​the social ties they have to families and neighborhoods, the sticky housing markets that leave them without options for housing or transportation to take a better job—​that we take the frictionless labor markets of theory

 



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for the reality of workers’ lives. A growing body of literature demonstrates the power of monopsony—​where employers exercise a power advantage over employees—​in contemporary American labor markets.104 Likewise if there is an information imbalance between the seller and consumer as a result of the seller’s market power, the seller can extract a rent by overcharging for the good. The producer or seller can maintain that advantage by suppressing competition or using its political influence to thwart government regulation. A major example of this problem is the healthcare industry in the United States, which has been increasingly effective at converting market power into rents generating high incomes for owners, shareholders, and top professionals and executives at the expense of the public. Providers’ advantages vis-​ à-​ vis patients, employers, and taxpayers pervade multiple sectors of healthcare—​from the providers of emergency medical services to hospitals and pharmaceutical companies. And, like other dominant corporate interests that deploy their market power politically to protect their rents, the healthcare industry is a major force in politics. Medical services in America are dominated more and more by a small number of commercial chains that operate air ambulance services, emergency department staffing at hospitals, and nursing home care.105 These companies’ ability to charge high markups has made them attractive acquisition targets for PE companies. These markups are a significant reason that healthcare spending has risen continuously. Analysis of the growth in healthcare spending from 2017 to 2018 found that at least half of the growth had to do with increased prices for goods and services; only around a third was due to greater use of healthcare goods and services, and only 13% to the aging of the population.106 For example, the air ambulance services industry has become heavily concentrated; 73% of the helicopters used by air ambulance operators are owned by just three firms. Prices are high and rising. The median price of an air ambulance helicopter transport doubled from 2010 to 2014, although prices are rarely known in advance to those who need the services or what portion of it will be borne by insurance.107 Consider the contrast with the “funeral rule.” In 1984, recognizing that people who are bereaved are purchasing services at a particularly vulnerable point in their lives, the Federal Trade Commission required funeral homes to post prices and prohibited deceptive and manipulative sales practices.108 Moreover, the 1978 Airline Deregulation Act prohibits states from regulating prices, services, or routes of air ambulances. Increasingly, the same is true of emergency room services, about a third of which today are owned by two for-​profit medical services firms, TeamHealth, owned by the Blackstone Group, and Envision Health, owned by KKR.109 Medical services firms also own many hospice care centers, rural hospitals, medical debt collection services, physician practices, and medical billing services companies.110

 

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Price markups for emergency room services, measured as the multiple charged by a provider over the Medicare rate for a given service, are high and rising. Currently, two-​thirds of hospitals use commercial medical services firms to staff their emergency departments.111 When these companies take over the management of emergency rooms, prices rise. Doctors order more imaging tests and charge at higher billing codes.112 They admit more patients to the hospital following the ER visit (emergency care is more profitable for the hospital if the patient is subsequently admitted to the hospital).113 Hospitals increase “balance billing” for charges not covered by patients’ insurance. One of the major medical service companies is Envision Healthcare, whose emergency care division is called EmCare. When EmCare takes over a hospital emergency room, the out-​ of-​network billing rises 80 percentage points.114 Markups are extremely high on these out-​of-​network services. One study found that markups for commercially staffed ED services were well over six times the Medicare rate.115 Another study found that the ratio of the price charged by emergency room providers over the Medicare rate varied by as much as 12.6 to 1. Notably, markups are higher for the most vulnerable patient populations, including those with more African American and Latinx patients. Markups for services were much higher when performed by emergency room doctors than when the same services were performed by generalists in the internal medicine department.116 Between 2012 and 2016, the average markup for emergency room services rose from 3.9 times the Medicare rate to 5.1 times.117 Concentration of ownership and the vulnerability and lack of information on the part of consumers—​patients—​account for these high and rising markups. Not only do those purchasing the service lack information about cost or how much of it will be borne by the insurance company, but often it is not the patient who purchases the service.118 Consequently, the provider has almost total market power. In the case of patients who have received services from air ambulance companies or emergency rooms of hospitals and for whom the service is covered neither by Medicare nor by private insurance plans, the companies exercise their market power by the practice of “balance billing,” which is the practice of billing a patient for the difference between the price paid by the insurer and the price charged by the firm.119 These prices vary widely. Many hospitals and medical service firms aggressively sue patients and garnish their wages in order to collect payment.120 Concentration also drives up prices by suppressing competition. This can be seen in the case of hospitals, where consumers often have greater choice than they do when seeking emergency services. Hospitals that have a monopoly in a given locality charge higher prices (12% higher) than do hospitals facing competition from at least four rivals. Mergers of hospitals in the same area have a similar effect, raising prices on average by 6% if the hospitals are no more than five

 



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miles apart.121 There is enormous variation in the prices charged by hospitals, little of it related to differences in patient characteristics.122 Some healthcare companies force insurers to cover all or none of their facilities in different regions. Clearly, as healthcare companies operating hospitals, physician practices, and other providers of medical services become more concentrated, they have acquired greater market power. This is a major driver of the high and continuing growth in overall spending on healthcare in the economy.123 The role of consumer vulnerability vis-​à-​vis the providers of medical services can also be seen in the case of nursing homes. A recent large-​scale study found that PE firms have been purchasing nursing homes (currently they own about 11% of all nursing homes). The researchers found a significant decline in the quality of care when a PE company purchased a nursing home, which they believed was probably the consequence of the cost-​cutting measures undertaken by the new owners: the most frequent moves that new PE firm owners took after buying a nursing home were to increase utilization while cutting nursing staff. The average total nursing staff hours per patient day fell by 1.4% after a PE firm purchased the nursing home. Mortality among Medicaid patients rose 10%, and other indicators of health, such as mobility, declined. Meantime, cost per patient rose and was shifted to Medicare. Much of the increased cost associated with a PE takeover was in higher debt service.124 As Anne Case and Angus Deaton have vividly demonstrated, the pharmaceutical industry affords still another example of the alliance of market and political power in the healthcare industry. With the approval of the federal government, pharmaceutical firms invested heavily in deceptive marketing of highly addictive synthetic painkillers to doctors and consumers. Individuals with low education and chronic pain proved to be an extremely profitable market for these drugs; 90% of the deaths from overdoses occurred among individuals without a BA degree.125 Intense lobbying by the industry succeeded in blocking efforts by the Drug Enforcement Administration to end the abuse of these opioids.126 The industry is extremely profitable. For example, the Sackler family, which owns Purdue Pharmaceuticals, received $12 to $13 billion from the $30 to $50 billion in sales of OxyContin.127 The industry’s support for the election campaigns of its champions in Congress cost it several millions dollars but achieved its goal of blocking regulation.128 The pharmaceutical industry has also increased its profits by winning follow-​on patents to medications, many of them intended to prevent rival drug companies from offering generic alternatives. For example, the US Patent and Trademark Office granted a patent to Abbott Laboratories for adding peppermint and cotton candy flavors to an existing HIV drug.129 Prescription drug prices have risen sharply,130 raising profits for the manufacturers, but the industry has successfully resisted demands to publish information about costs

 

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and profit margins. Filing hundreds of applications for secondary and tertiary patents not only benefits the pharmaceutical companies, but also the Patent and Trademark Office. The PTO’s revenues come from fees paid by applicants, and most of the fees are only paid when the patent is approved. As Michael Frakes and Melissa Wasserman show, the spread of the model under which public agencies rely on privately paid user fees—​a practice used as well by the Securities and Exchange Commission, Federal Trade Commission, and the Food and Drug Administration—​compromises the integrity of government regulation of the market.131 In the case of the PTO, this practice contributes to the excessive approval of bad patents.132 Multiple factors combine to produce high market power for nursing home operators, providers of emergency medical services, pharmaceutical companies, pharmaceutical benefits management companies, and other components in the healthcare system: the vulnerability of patients, the absence of accurate pricing information, and the concentration of ownership. Competition fails because providers do not reveal information about price. At the same time, the regulatory environment neither requires them to compete nor checks their ability to exploit their market power. And despite periodic congressional inquiries into the abuses caused by “balance billing” and other practices by medical service providers, neither competition nor price regulation protects consumers. Intense lobbying by the medical services industry successfully blocked a congressional bill to end the practice of surprise billing for emergency room services.133 The United States spends about twice as much as other rich countries on healthcare as a percentage of GDP, about 55% of it in the private sector (in all other rich countries, most healthcare spending is done by public sector).134 Case and Deaton estimate that the United States spends about $1 trillion more for medical care than is medically justified.135 What from the standpoint of medical care is wasteful, however, is profitable for those who have manipulated the institutional environment so as to maximize their market power vis-​à-​vis consumers. For the most part, neither regulation nor competition operates to check the market power of providers vis-​à-​vis consumers. The result is poor quality, high inequality, and high prices, by comparison with other high-​income countries. The premise of consumer choice is belied by the fact that consumers are charged for tests and procedures that they have minimal understanding of or choice over. The costs, whether borne by individual households, insurers, or government, generate immense rents for the providers and the PE firms that own them. When TeamHealth hired a new CEO in 2016, he received a base salary of $1 million, a signing bonus of $2.8 million, and several performance-​based incentive bonuses. His predecessor was eased out with a two-​year severance package worth $3 million.136 The compensation of the CEOs of the PE firms that own these and other medical services companies is many times higher

 



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still. TeamHealth is owned by the Blackstone Group, whose CEO, Steven Schwarzman, received at least $567 million in 2018.137 The two co-​CEOs of KKR, which owns the Envision Healthcare company, each received $55.6 million in carried interest on top of relatively small base salaries ($300,000) in 2018; each also received over $40 million in dividends.138 As a Harvard study found in the mid-​1990s, the incentives built into the healthcare system “allow providers, payers, and suppliers of drugs and equipment to prosper while costs escalate.”139 They argued that competition in the system, if properly regulated, would improve quality, accessibility, and equality of healthcare while lowering prices, but only if there was universal healthcare coverage to eliminate the market distortions that occur as a result of patient dumping and cost shifting.140 Regulation requiring providers to post accurate information about prices and quality would limit their ability to price-​gouge by exploiting the vulnerability of patients. The objective should be to make competition drive innovation in quality, not to use market power to extract rents. Far from confronting a trade-​off between equity and efficiency, regulated competition would increase both. The acquisition of medical service providers by PE companies starkly illustrates the effect of rent-​seeking by firms with market power. As the medical service companies increase profits by cutting quality of care, exploiting the vulnerability of patients in emergency situations, manipulating insurance billing codes, and overcharging for services—​all practices documented in the research cited above—​those profits enable the owners and managers of the medical service firms, and the PE firms that own them, to enrich themselves at the expense of consumers. At the same time, the high cost of the healthcare system weighs down the economy more broadly. It keeps wages low and companies uncompetitive. A private employer health insurance plan now costs about $21,000 for a family, $7,200 for a single person. Employers therefore are understandably reluctant to assume these costs, particularly in the case of small businesses and businesses that hire relatively low-​wage workers. As a consequence, more and more workers—​particularly those who are most vulnerable—​have lost their health insurance coverage due to the loss of employment.141 For instance, half of workers in the hospitality sector lack employer-​provided health insurance.142 This is true also of 40% or more of workers in arts and entertainment, construction, retail, and other service jobs; and over 34% of those in the healthcare field.143 Although the high cost of medicine in the United States generates high profits and incomes for those at the top, it does not produce better healthcare for the country, in terms of either quality or equity. Compared with 11 peer countries, the United States has the worst health on almost all counts—​higher infant mortality, lower life expectancy, higher rates of avoidable hospitalizations for chronic

 

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conditions such as asthma and diabetes.144 Moreover, health was worsened as inequality has grown. Our maternal mortality rate is now eight times higher than that of Germany but was three times higher in 2000.145 Within the United States, disparities by race and state are acute: Black women are over three times as likely to die from pregnancy-​related causes as are White women.146 The ratios by state vary by as much as four or five to one.147 The United States also has the highest prices for drugs, tests, and hospital and physician services and the highest inequality in health both geographically and by socioeconomic status.148 The high price of American healthcare relative to other developed countries is not explained by population aging, nor do we have more smokers. Higher rates of obesity are a factor. But the largest factors are the much higher price of brand-​ name prescription drugs, the higher rates of use of expensive medical technology, and the higher fees paid to providers.149 The nature of spending on healthcare differs considerably across racial and ethnic groups. Overall, the non-​Hispanic White population comprises about 61% of the total US population (2016) but spends about 72% of total US healthcare spending (covering ambulatory care such as doctor and dentist visits, in-​patient care at healthcare facilities, and prescription drugs). Blacks constitute 12% of the population and spend nearly the same proportion—​11%—​on healthcare. However, the types of spending differed significantly. Compared with the total population, Whites spent 15% more on ambulatory care; Blacks spent 26% less. On the other hand, Blacks spent 19% more on in-​patient care and 12% more on emergency room care. Hispanics, on the other hand, spend 33% less on ambulatory care than the average for the population.150 The data tell us that the much lower access of Blacks and Hispanics to doctors’ offices results in much higher rates of hospitalization and emergency room visits. This is yet another way in which inequality across economic and social groups imposes high costs on the entire society. The healthcare industry also illustrates the deep connection among changes in the structure of the labor force as a result of the loss of manufacturing jobs, the growth of demand for healthcare in an aging population, and the rent-​driven model used by the healthcare industry. Gabriel Winant’s powerful study of the Pittsburgh economy, The Next Shift, shows the direct relationship between the decline of manufacturing employment in the old industrial cities such as Pittsburgh and the rapid rise of employment in the lowest-​wage sector of the healthcare industry—​personal care jobs in hospitals, nursing homes, and other care facilities. Whereas steelmaking represented over 15% of the total workforce in Pittsburgh in 1950 and, with other manufacturing, mining, and industrial jobs, dominated the economy, today, 18% of the workforce in Allegheny County—​where the Pittsburgh metro area is located—​works in healthcare and social assistance.151 Widening the income gaps in the Pittsburgh area are the fact

 



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that the dominant hospital system in the area, UPMC, the largest employer in the state, classifies its employees as “independent contractors,” for whom it bears no responsibility as an employer, and the fact that the workers who in fact work there are disproportionately female and Black and earn low wages.152 Whereas steelworkers’ wages and benefits enabled them to lead middle-​class lives in the 1950s, healthcare workers today earn wages well below the median wage.153 Healthcare and personal care worker jobs, however, are among the fastest-​ growing categories of employment. The high cost and unequal availability of healthcare imposes a heavy cost on society generally. Those living in densely settled neighborhoods, relying on public transportation, and holding the lowest-​wage jobs, are at the same time the most likely to be exposed to the virus and to lack access to healthcare insurance. At the same time, the high cost of healthcare imposes a rising burden on taxpayers through Medicare, veterans’ care, Social Security disability, and Medicaid. Medicaid alone now takes around 30% of state spending. Case and Deaton think of the growth of healthcare costs as a “cancer that has metastasized throughout the economy.”154 Thus the costs of an uneven and generally low-​quality healthcare system are diffused widely across the society, but the rents it generates from the market power of the private firms comprising it are concentrated.

4.7.  Conclusion This chapter has offered evidence about several ways in which the alliance of corporate interests, conservative activists, and government policymakers has expanded rent extraction in the economy. Although concentration has risen in some industries, it has fallen in others, and by itself, a high level of concentration in an industry does not necessarily lower competition and allow firms to raise markups. But in some industries, high concentration has facilitated both higher profits as well as greater influence over government. Examples of these industries include healthcare and finance. In these industries, market power is high, contributing to wage inequality within industries as well as income inequality in society, as costs are pushed onto taxpayers, or onto the poor as public provision of social insurance and public services becomes privatized. Reinforcing these policies has been the promotion of an ideology serving to justify and rationalize them through an appeal to antigovernment sentiments and a doctrine of neoliberalism. The ideology helps consolidate the coalitions of industries and advocacy groups with policymakers that shape legislation, administrative rule-​making, and judicial decisions dealing with economic and social policy. The accumulation of political advantage then feeds back into the economy, driving inequality higher.

 

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This chapter cited healthcare as an example of an industry rife with rent-​ taking. Chapter 6 discusses the financial sector. We have seen that market power in healthcare not only generates high incomes for the beneficiaries, but has also produced wide differences in access to healthcare across socioeconomic groups and geographic units. Many categories of the population suffer from severe inequality in access to healthcare: rural communities distant from hospitals; people who receive large, unexpected “balance bills” for emergency services; elderly people; people with chronic disease; and other vulnerable groups. The market for highly addictive synthetic opioids was most concentrated in regions experiencing high levels of dislocation from industrial decline. Within the healthcare sector itself, acute inequality in wages prevails between the low-​ paid workers providing personal care services and the top executives of the companies to whom services have been outsourced, and still higher returns to the private investors who in turn own those companies. The high cost of healthcare in America—​higher than in other developed democracies—​has driven up insurance costs for the rest of the society, which in turn have worked to keep wages low and access to healthcare unequal. Most recently the Covid-​19 epidemic has revealed the deep interconnection between economic inequality and health in the United States. The reasons lie in the way the economy’s evolution has been shaped by and in turn has shaped the political system over the last four decades. High and rising inequality has not only had a direct effect on the gutting of the public health system, but it has also deepened the political polarization that has stymied our ability to deal with public crises such as Covid-​19 and global climate change, and the rise of violent right-​wing extremism. The next chapter looks more closely at the connection between inequality and political polarization.

 

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5.1.  Democracy and Political Equality In liberal democracy, electoral contests are the main way to aggregate citizens’ diverse political preferences into a single majority-​preferred choice. Competing parties narrow the limitless range of people’s demands down to a reduced set of policy alternatives from which the voters must choose one. If we accept the legitimacy of the process, we accept the legitimacy of the outcome, even if it is a choice we oppose. Formal analysis has proven that when a collectivity decides an outcome by majority rule, under a specific set of conditions, the median voter—​that is, the voter who is flanked by equal numbers of voters to the left and right—​determines the outcome.1 Those conditions are very particular: people’s preferences must be ordered in such a way that each voter has only one most-​preferred position, and less-​preferred outcomes are preferred less to the extent that they are located farther in policy space from the most-​preferred position. Policy choices are lined up in just one dimension, for example a left-​right economic one (higher taxes, more redistribution vs. lower taxes, less redistribution). A powerful implication of these propositions is that, if the conditions apply, then under two-​party competition we expect candidates and parties to take positions that appeal to the median voter. This pulls politics in the direction of centrism and moderation.2 The median voter theorem can be used to explain the redistributive implications of democracy. A classic paper in economics showed that voting under majority rule should move government fiscal policy toward taxing and spending policies that tend to equalize incomes.3 In this model, taxes are progressive and yield revenues that are redistributed to taxpayers in inverse proportion to income. Ignoring for a moment the degree to which taxes represent a deadweight drag on the economy, imagine that the voter in a society who is at the mean in the income distribution receives an income much higher than the voter who is at the median of the distribution—​as is the case in the United States. (In The Returns to Power. Thomas F. Remington, Oxford University Press. © Oxford University Press 2023. DOI: 10.1093/​oso/​9780197685952.003.0005

 

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2019, median personal income was about two-​thirds of the mean, down from about three-​quarters of the mean in the mid-​1970s.)4 Then the voter at the median income level sets the tax rate (t) at a level that equalizes the incomes of the median and mean income-​earner. It is an appealing model, but, as we know, the world does not work according to its predictions. Many real-​world political forces pull policy away from the center.5 In the United States, post-​tax and transfer income is only moderately less unequal in its distribution than pretax and pretransfer income, as I showed in Chapter 2.6 In fact, looking at the industrialized democracies generally, it is the countries where pretax income is the most unequally distributed that have the lowest level of redistribution through taxes and transfers.7 The model is useful not because it describes how democratic politics actually work, but because it requires us to ask: What blocks the redistributive potential of majority rule? The premise of political equality and majority rule sets democracy apart from other institutions for aggregating preferences. A democracy might stipulate that a decision requires a supermajority or even unanimity. A democracy might even reject voting as a way of choosing a leader. For example, ancient Athenian citizens chose members of their Council of 500 by lot, and some still think that choosing leaders by lot—​a procedure known as sortition—​would be preferable to elections.8 In some markets, we auction off our prizes to the highest bidder. Stock markets use auctions to aggregate the demands of market participants for stock shares. There is a fundamental difference between democratic elections and auctions as mechanisms for aggregating preferences. At an auction, participants bid on their preferences with money. In democracy, each participant has one and only one vote. Equality of voting rights therefore is the only sure way to equalize political influence when other resources are unequally distributed. For that reason, political equality is the fundamental premise of democracy.9 It has taken centuries to achieve widespread acceptance of the principle that all citizens should enjoy equality of political voice, an outcome reached only as more and more categories of people have fought for recognition of their equal rights as citizens. And the struggle is by no means over.10 Some still believe there should be property qualifications limiting the franchise.11 Other conservatives believe that because majority rule grants ignorant, bigoted, and spiteful people the same right to vote as thoughtful and civic-​minded people, the outcomes of majority rule are frequently disastrous. National Review fellow Kevin Williamson recently argued that since “voters got us into this mess,” the clear answer is that we need “fewer but better voters.”12 Williamson was of course not only echoing Vladimir Lenin’s famous phrase, he was following Lenin’s philosophy of government, which was opposed to majority rule and political equality. Like Williamson, Lenin viewed

 



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the majority of voters as unready to exercise the rights and responsibilities of governing.13 Democratic theory holds that political equality, and only political equality, can offset the inequality in the distribution of other resources—​wealth, social status, connections.14 But while formal political equality is a necessary condition for equality of voice, it is far from being a sufficient one. Since we allow individuals to draw upon all their resources to participate in politics, only equality of voting rights can counter the cumulative advantages enjoyed by the wealthy. For this reason, democracy always poses the threat of redistribution. Therefore the greater the disparities in the distribution of wealth, power, and status, the more fiercely those with wealth, power, and status will oppose any moves to democratize the polity.15 The redistributive implications of democracy—​of equality of political rights—​always shape political life, including in dictatorships. In this chapter, I will concentrate on the ways that the dominance of powerful, wealthy interests and their political allies in the United States have chipped away at the principle of equality of political rights by exploiting restrictions on majority rule built into the Constitution that were set as a result of concessions to southern slave-​owners. In Chapters 7 and 8, I will discuss the assault on what limited political rights were established after liberalization in Russia and China. In all three cases, though, the underlying logic is the same: when economic inequality is high, political equality endangers the interests of the powerful and the wealthy.

5.1.1.  Early Winners The alliance of wealth and power that can form in the early stages of a turn toward liberalization is starkly illustrated by the course of market transition in Russia and many other East European postcommunist societies, where, as I mentioned in the previous chapters, those economic interests that benefited from a partial opening to the market were able to exert their political influence and to foreclose possibilities for further reforms. This turn of events, though, ran counter to many people’s expectations. Market-​oriented reformers faced the political dilemma that their policies would undermine the security of many, even most, people in the short term. They counted on the prospect that market-​led economic growth would eventually bring long-​term prosperity to the majority. In the short run, however, political equality and majority rule posed a serious threat to their ability to retain power. Writing in 1991, on the basis of Latin American experience and looking ahead at the likely consequences of market liberalization in Eastern Europe, political scientist Adam Przeworski conjectured that the phase between the immediate

 

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sharp decline in living standards following the inception of market reform and the expected longer-​term rise in general prosperity thereafter was therefore a dangerous moment for reformers. It was at that point when opponents of reform (leftist parties, trade unions, disgruntled workers) were most likely to mobilize to reverse the reforms, especially if the trough were protracted. His “J-​curve” graph (Figure 5.1) visually illustrated the conjecture.16 In 1998 Joel Hellman made a startling observation about the postcommunist countries. He showed that it was not in fact the groups who lost the most that stopped reform. Instead, partial liberalization allowed a small group of influential owners and managers of lucrative assets in newly liberalized markets—​such as those in the natural resources and financial industries—​to take advantage of their market positions to lock in power and block a further opening to a fully competitive market economy. These “early winners,” who captured disproportionate gains from arbitrage between state prices and market prices, allied with political leaders to claim rents from suppressing market competition. Hellman argued that it was these early winners, not the broad strata of net losers, who were the real obstacles to a full market opening. Reform became stuck partway in what Hellman termed a “partial reform equilibrium.”17 Several years later, building on Hellman, another political scientist, Timothy Frye, proposed a model of “elite exchange” under which powerful business interests could obtain disproportionate influence over policy but had to provide benefits to policymakers. In the elite exchange perspective, oligarchs form an alliance with policymakers benefiting both by protecting their shared rents and by blocking redistributive pressures from labor and other interests.18 The relationship is one of collusion in rent-​sharing rather than the capture of the state by the wealthy.19 Liberalization and privatization in highly regulated economies will always affect the distribution of advantage and disadvantage by creating winners and losers.20 As competitive pressures arise from the decontrol of the economy, many suffer from lost employment, lower wages, and rising prices. A smaller The J-curve model of market transition

Aggregate living standards

Time

Figure 5.1:  The “J-​Curve”

 



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number of people are net beneficiaries of the reform. These include not only those with those with entrepreneurial talent and skill, but also those who are well positioned through personal connections to gain access to profitable resources. Under majority rule, therefore, a leader aiming to launch a major program of market-​oriented reform therefore faces the danger identified by Przeworski, particularly as the losses are concentrated among public sector workers and urban consumers, whereas the benefits are widely diffused and slow to arrive. Reformers lacking strong political support are therefore motivated to look for allies precisely from among the early winners of reform. These early winners, as Hellman argued, have every interest in using their influence in government to protect their gains and minimize potential market and political competition. The early winners’ dilemma—​how to safeguard and, if possible, increase their advantages over the long term—​is not confined to the postcommunist environment. Corporate interests and politicians in the United States faced it as well. They feared popular resistance as living standards fell and formerly protected interests were exposed to competition. The Reagan program led to the worst recession since World War II and a sharp jump in unemployment, along with significant wage losses. As of fall 1982, a majority of Americans said that Reagan’s policies had made their personal situation worse.21 Conservatives faced a dilemma. Either prosperity would soon become widely shared, or they had to reduce the threat of a successful mobilization against them from the left. Liberalization in the United States starting in the late 1970s took a path closer to the latter strategy than the former, that is, it sought to insulate its program politically. Prosperity was not broadly shared, and a severe recession struck in the early 1980s. To protect their shared interests—​the politicians in retaining political power, their corporate allies in holding on to their market power—​they pursued a program of weakening their opponents at the expense of the liberalizing impulses of the reform program. The alliances between the politicians and large corporations became entrenched and self-​reinforcing, generating rents that benefited each side at society’s expense and significantly contributed to the growth of economic inequality. The mutual dependence of those with market power and those with political power rested on more than cronyism, however. The greater the political vulnerability of the reformers, the greater their interest in winning the support of the economic beneficiaries of liberalization. The two sides collaborated in creating an institutional order that would sustain their alliance over time and render it invulnerable to the threat of majority rule. This, in a nutshell, is the political logic that the cases of Russia and China help demonstrate. There, where a far more comprehensive communist economic system was dismantled, the tendency for a narrow set of beneficiaries of partial liberalization—​a handful of wealthy private sector tycoons and a larger sector of state monopoly enterprises—​to lock in their economic advantages in return for support for an authoritarian political regime—​has progressed much

 

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further toward the concentration of wealth and power than has occurred in the United States. But the underlying character of the early winners alliance is the same. The alliance is best understand as a mutually beneficial exchange based on the income rents from restricting the claims of labor and the public. The political and material support of the corporate interests wielding market power supplies the politicians with valuable resources for their continued claim on power. In return, the political leaders can close off avenues for potential challenges to corporate interests’ opponents, business rivals, organized labor, and the general public. With time, the alliance of big business with their political friends gains strength as their advantages compound. In the United States, after deregulation, the formerly regulated industries began to undergo a process of reconsolidation after an initial spurt of entrepreneurial competition. In the postcommunist world, those firms that wielded substantial market power before liberalization—​such as the state monopoly enterprises in Russia and China controlling strategically important sectors such as natural resources, energy, and telecommunications—​ were the least likely to be broken up and exposed to market competition. Where concentration arose after liberalization, government protected it from market pressure. Firms in the most concentrated industries (such as energy in all three countries) offered the greatest opportunities for rent-​sharing between firms and politicians. By the same token, where potential rents were least concentrated at the time of the market reforms, such as in the consumer goods sector, politicians were least likely to protect them from further competition.22 Firms with largely local markets and low markups (such as some food and beverage production, construction, and recreation) faced stronger competitive pressures. An example from Russia is the beer-​brewing industry. Highly localized at the time of the market reforms, it witnessed a high level of entrepreneurship and competition and largely escaped the trend toward concentration. In this way, concentrated economic rents foster the concentration of power. This basic observation underlay the early doctrines of antitrust law in the United States, such as those voiced by John Sherman, Louis Brandeis, Theodore Roosevelt, and Woodrow Wilson.23 More than a century ago, Louis D. Brandeis wrote: “Power begets wealth; and added wealth opens ever new opportunities for the acquisition of wealth and power.”24 Market-​oriented Progressives such as Brandeis rejected the view, common among many socialists and capitalists, that the giant trusts of the turn of the 20th century represented the “highest form of capitalism.” Rather, they considered the giant trusts to be not only dangerous for market capitalism, but threats to democracy as well. The Sherman Act of 1890 prohibited “unreasonable” restraints of trade as well as “any attempt to monopolize” commerce. The Clayton Antitrust Act of 1914 prohibits mergers and acquisitions when the “effect of such acquisition may be substantially to

 



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lessen competition, or to tend to create a monopoly.” Although enforcement has been inconsistent, both laws remain in force. From the mid-​1930s to the mid-​1970s, courts tended to take seriously their goal of preventing the abuse of dominance by large firms and corporate actions likely to result in monopoly on the grounds that concentrated economic power threatened the integrity of democracy. Supreme Court Justice Felix Frankfurter noted, in his opinion in US v. UAW-​CIO [1957], “the popular feeling that aggregated capital unduly influenced politics, an influence not stopping short of corruption. . . .[Wealth] was gravitating rapidly into the hands of a small portion of the population, and the power of wealth threatened to undermine the popular integrity of the Republic.”25 In the Brown Shoe Co. v. United States decision (1962), the Court argued that the dominant theme pervading congressional consideration of the 1950s amendments was a fear of what was considered a rising tide of economic concentration in the American economy. . . . Throughout the recorded discussion may be found examples of Congress’ fear not only of accelerated concentration of economic power on economic grounds, but also of the threat to other values a trend toward concentration was thought to pose.26 Some European thinkers also took this view. One German economist wrote a book in 1912 arguing that cartels were exercising coercive market power against both their own members and other market participants. Among other pieces of evidence, the author cited the previous year’s US Supreme Court ruling against Standard Oil of New Jersey.27 These antimonopoly views were further elaborated by a group of legal and economic thinkers in Germany, who argued in the 1920s and 1930s—​as monopoly capitalism, fascism, and Soviet communism were rising—​that only government power preserving market competition against monopolistic abuses could protect individual economic and political liberty.28 Their belief that government must intervene to preserve competition in the marketplace became a fundamental principal of postwar German democracy. Chapter 9 will discuss the influence of these ideas on Germany’s postwar development.

5.1.2.  The Ascendancy of Corporate Power in the United States Through the 1970s big business in the United States began to take a much more active role in politics to fight government regulation and organized labor. Republicans and moderate Democrats also agreed that government regulation

 

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of major industries had outlived its usefulness and was dragging down the economy.29 And, as the previous chapter showed, a brief burst of competitive dynamism did follow deregulation. By the late 1980s, however, many industries began to reconsolidate. The Reagan and most subsequent administrations favored this trend. In a number of sectors, including finance, energy, telecommunications, and airlines, firms gained in market power vis-​à-​vis both rival firms and labor. The coalition of conservative interests and big business joined in favoring less government regulation, lower taxes, and weaker labor rights and lent their backing to friends in government. In the United States, the 1970s was a time when the conservative wing of the Republican Party and business establishment was on the defensive.30 The social unrest and activism in the 1960s and corporate scandals of the 1970s left big business anxious about public support for capitalism. Ralph Nader was exposing scandalous instances of negligence by corporate America. Corporations, however, lacked much capacity to pool their forces in the political arena. A famous memo written in 1971 by future Supreme Court justice Lewis Powell, then a corporate lawyer in private practice, argued that big business must learn to act collectively in the political arena: The American economic system is under broad attack. . . . Business must learn the lesson . . . that political power is necessary; that such power must be assiduously cultivated; and that when necessary, it must be used aggressively and with determination—​without embarrassment and without the reluctance which has been so characteristic of American business. . . . Strength lies in organization, in careful long-​ range planning and implementation, in consistency of action over an indefinite period of years, in the scale of financing available only through joint effort, and in the political power available only through united action and national organization.31 After newspaper columnist Jack Anderson obtained a leaked copy, the Chamber of Commerce publicized it widely.32 Powell’s manifesto clearly expressed the sense of vulnerability corporate leaders felt to adverse trends in society, which they considered necessary to combat by political mobilization. Although the shift toward the new paradigm of deregulation and liberalization began in the 1970s, under President Ronald Reagan it turned into a comprehensive program. Reagan’s later popularity makes it hard to remember how much resistance he faced to this program. Reagan’s approval ratings only soared after he left office. In the first few years of his presidency, his approval fell below 50% as a result of the recession caused by his policies, and his average approval over the

 



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8 years he served (53%) was lower than either of his two successors.33 Likewise Republican Party support was falling. At the point Reagan defeated Carter in 1980, Republican Party identification had been sliding downward sharply for nearly 40 years. From the late Eisenhower period through the late 1970s alone it fell about a third (from 33% identifying with the Republican Party in 1957 to 21% in 1979).34 Reagan’s landslide victory in 1980 was achieved in the Electoral College: his share of the popular vote (50.75%) was hardly more than Carter’s had been in 1976 (50.08%). Even at the end of the Reagan era, Republican Party identification remained below Democratic identification (32% Republican vs. 34% Democratic in 1989). At the outset of the deregulation movement, the public, organized labor, and much of the business community were skeptical about or outright hostile to deregulation.35 Public acceptance only grew over time. The political challenge for conservatives therefore was to lock in the new paradigm, placing it outside the reach of majoritarian institutions. Following a major liberalization initiative, the firms that benefit from the initial market opening have every interest in preserving and expanding their market power. Those in government with whom they ally, for their part, have every interest of staying in power. Even in an electoral democracy, where the party that launched the reforms may be replaced at a future election, their leaders and supporters are motivated to lock in their advantages across future election cycles. In the United States, this has meant that the Republican Party has grown increasingly dependent on the material and political support of those that can supply it with rents from market power; the corporate interests and wealthy donors who supply those benefits share a common goal with the party of reducing the threat posed by majoritarian electoral competition. This alliance works both in the electoral arena and in those sectors of society that are removed from political competition, such as the courts and the media. As its traditional social base has narrowed—​middle-​class voters, White voters—​the Republicans have relied increasingly on funding from wealthy conservatives and antidemocratic populist appeals. Still, just because two sides can be made better off by institutionalizing their cooperation does not necessarily ensure that they will do so. For one thing, each side faces collective dilemmas of its own. Politicians compete with one another just as firms do. A given firm has a more immediate stake in protecting its own position than in helping its own rivals in the same industry. Still more diffuse is its interest in securing the interests of big business as a whole. No single firm, therefore, willingly undertakes the entire cost of building a broad industry or probusiness coalition, just as no one politician is willing to build a larger umbrella under which to share the benefits of winning office—​even if all would be better off if one existed.36 On both sides, therefore, an organizational

 

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entrepreneur who solves these collective dilemmas and forges the alliance can make all participants better off. In the United States, ideologically motivated activists have played this brokering role, linking the early winners of the Reagan policies with conservative funders and the Republican Party in order to pool their collective power around a broad shared ideological platform. Party campaign funds, political action committees, policy think tanks, and other organizations provide them with channels for bundling their influence and resources. They pushed the Republican Party away from a centrist position and turned it (as has occurred several times in the party’s history) into the political instrument of the economic interests of the wealthiest segments of society.37 Thanks in part to its embrace of cultural conservatives and antiestablishment populists, it has succeeded in suppressing many of the mechanisms through which challengers from within or outside the party could mobilize votes against it.38 To speak of an alliance between conservative politicians and big-​business interests is not to say that there is a unified “power elite.”39 Terms such as alliance or union simplify a far more complicated set of relationships. On both sides are multiple actors with interests, often competing with one another, and often contending over issue positions. Their relationships can be individual or collective, small scale or broad, formal or informal. No single overarching organization unites all politicians or all corporations, although wealthy right-​wing interests do work hard to pool the resources of donors, policy experts, legislators, and others and channel them for political influence.40 The notion of an alliance refers to the net outcome of a broad range of collective efforts. I use the term “alliance” to underscore two important points: first, that the relations between the economic interests benefiting from the current arrangements and the political officials that maintain those arrangements are based on reciprocity and exchange, not a one-​sided takeover by big business. Second, the partners in this alliance share an interest in excluding outsiders—​whether workers or political opponents. And because they recognize they represent a minority of the electorate, they have pursued a diversified portfolio of strategies, both electoral and nonelectoral.41 In the 1970s, big business launched a multifaceted and thoroughly organized political campaign to shift the direction of national policy.42 Conservatives and libertarians backed by big business founded the Cato Institute, the Heritage Foundation, and American Enterprise Institute. Corporate political action committees multiplied. They also armed themselves with lawyers. In 1977 the US Chamber of Commerce spun off an arm called the US Chamber Litigation Center to defend business interests in court. The center enjoyed a remarkable 70% success rate in the cases it pursued.43 To push the media rightward, Republican activist Roger Ailes founded Fox News in 1996 with the goal of propagating a conservative slant on news. To channel more money and organizational

 



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resources into libertarian causes, David and Charles Koch founded Americans for Prosperity and an extensive network of other organizations beginning in the early 2000.44 Conservative activists and donors also acted at the state level, in 1973 creating the American Legislative Exchange Council (ALEC) and the State Policy Network in 1992.45 Particularly after the Citizens United decision of 2011, these organizations poured in large amounts of “dark money”—​that is, spending by nonprofit social welfare organizations to influence policy that is permissible so long as their “primary” purpose is not electoral politics. These donations are not subject to the transparency requirements that explicitly political contributions are. Wealthy corporate interests can contributed unlimited amounts of funds to such organizations free of any requirement to disclose their spending. In part, the multiplication of organizations helps overcome the challenge of coordinating overlapping but distinct sets of interests, particularly those of major corporations, major donors, and ideologically driven causes.46 A corporation or business association uncomfortable with a particular cause can instead direct its funds to legislative efforts tailored to its immediate interests, allowing the bundlers to direct more resources elsewhere. Coordination within and among this network of organizations minimizes competition among them, enhancing the cohesion and effectiveness of the coalition in the absence of any single central intelligence. Coordination also enables backers of cause groups to maintain secrecy and anonymity.47 As political scientists Theda Skocpol and Alexander Hertel-​Fernandez show, this network of organizations pursues many related activities: developing policy proposals, advocating for policies, coordinating donors, mobilizing voters, and performing sophisticated data analytics.48 The coalition has benefited from demographic and institutional forces that reinforce the conservative representational bias built into the Constitution. The Electoral College is a case in point. Although the Electoral College has not systematically favored either party in the past, it has been much more favorable to Republican presidential candidates than Democrats in recent times. Contemporary Republican politicians are acutely conscious of the political bias of the Electoral College since twice in the last 20 years it has delivered the presidency to a Republican candidate who lost the popular vote. A group of Republicans in Congress recently wrote: “From a purely partisan perspective, Republican presidential candidates have won the national popular vote only once in the last thirty-​two years. They have therefore depended on the Electoral College for nearly all presidential victories in the last generation.”49 Historically, political interests rooted in divisions of race and region have blocked every effort at major reform of the Electoral College institution for over 200 years: as Virginia senator James Barbour put it in 1816, direct popular election of the president would be incompatible with the “population anomalous” of the South.50

 

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Still more countermajoritarian as an institution for converting votes into seats is the US Senate.51 By giving every state equal representation, the structure of the Senate consistently favors the minority party.52 The imbalance between votes and seats has only grown in recent years. After the 2020 election, the 50 Democratic senators represented a total of 184.5 million voters versus the 143 million represented by Republican senators. Deliberately designed to serve as a countermajoritarian instrument of representation, the Senate’s distorted form of equal representation has had increasingly important consequences as the population of larger states has grown faster than that of smaller states. The smaller states tend to be more rural and more homogeneously White than larger states, with the result that the Senate gives a built-​in advantage to Republicans. This bias not only yields a disproportionate share of federal budget transfers to smaller and more rural states, but also facilitates Republican vetoes of policies favored by a majority of Americans.53 Likewise the House of Representatives has grown more unrepresentative, in part as a result of more aggressive partisan gerrymandering. In the 2016 elections, the Republican share of all votes cast for House candidates was 50.6% to the Democrats’ 49.4%. However, the Republicans captured 55.4% of the seats. Republicans have benefited from significant disproportionalities in nearly all elections since 1994.54 Since then, Republican candidates have won a higher share of seats than votes in all but one election. Several changes since the mid-​1990s have favored the Republicans, especially partisan redistricting, which magnified the effects of trend toward self-​sorting of voters into more homogeneous jurisdictions.55 Consistent with the antimajoritarian impetus of the conservative movement was the effort to remake the lines of congressional districts in states so as to pack the largest number of Democratic voters in the smallest number of districts.56 This has been easier to the extent that malapportionment at the state legislative district level produces artificial majorities in the state legislatures that draw the maps for federal congressional races.57 Although both parties have gerrymandered seats, Republican control of a majority of state legislatures in recent years has enabled redistricting to favor Republicans.58 Thus partisan manipulation of the institutions of representation has magnified the effects of the original disproportions written into the Constitution. In addition, post-​1960s shifts in the electoral bases of the two parties have contributed to the partisan-​ideological realignment of the electorate.59 White racial resentment has been a major underlying factor driving the new ideological-​partisan division in the country, although broader social trends also contributed to the cultural dislocations that led to sharply defined partisan division. Political scientist Alan Abramowitz argues that these demographic and social trends, more than gerrymandering of electoral districts, have produced the

 



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strong correlation between voting patterns at the national and local levels and the high rates of incumbency in House districts.60 Demographic differences in the distribution of the two parties’ voters across districts contribute to the countermajoritarian effects of these institutions. In part because of the growing tendency for voters to reside in districts and states where there are others of similar circumstances, Republican voters are distributed more “efficiently” from the standpoint of their ability to win disproportionate influence in government. Republicans are spread out more evenly across electoral districts and states, whereas Democrats tend to be concentrated in a smaller number of populous states and cities. This demographic fact helps Republicans capture a disproportionate number of majorities in House and Senate races despite having fewer voters than the Democrats. In particular, Republicans also predominate in smaller states, which enjoy a disproportionate number of Senate seats relative to the population of the states as well as magnifying their influence in the Electoral College. This has given Republicans disproportionate power in Congress, and, as the disparities in populations of large and small states widen, the inequality of political influence between Republicans and Democrats widens with it.

5.1.3.  The Rights of Corporations In two landmark Supreme Court cases in 1962 and 1964—​Baker v. Carr and Reynolds v. Sims—​the US Supreme Court held that the principle of equal rights established by the 14th Amendment required ending gross disproportions in the representation of citizens by state legislatures.61 The Court found that the Constitution required a rough correspondence between the number of voters in a legislative district and the number of legislators elected—​one person, one vote. These decisions overturned the extreme inequality in legislative representation that was a legacy of slavery and racial segregation, as well as the rural bias built into districting in many states. By the mid-​20th century, these institutional arrangements left the United States with the most unequal system of political representation in the developed world.62 But less than two decades after the United States struck down one egregious source of political inequality, the rising coalition of big business, ideologically motivated advocacy groups, and their Republican allies undertook new efforts to reengineer the rules of representation so as to dilute the principle of political equality. The leaders of the post-​1970s corporate-​conservative alliance claimed to be acting in the name of the public interest against government overregulation, labor power, and Democratic tax-​and-​spend policies. However, as they have periodically admitted, in order to succeed, they must counter the principle of political equality. Republican presidential candidate Mitt Romney acknowledged

 

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this in his famous comment to a group of wealthy donors in 2012 that President Obama could automatically count on the support of the 47% of the electorate who paid no [federal] taxes and who, as he inaccurately claimed, depended on government benefits.63 More bluntly still, Paul Weyrich (founder of the Heritage Foundation and of ALEC) explained in 1980: “I don’t want everybody to vote. Elections are not won by a majority of the people. They never have been from the beginning of our country and they are not now. As a matter of fact, our leverage in the elections quite candidly goes up as the voting populace goes down.”64 Accordingly, beginning in the early 1980s, Republicans began a new campaign to undermine the principle of one person, one vote. As some Republicans have acknowledged, lower turnout benefits them.65 One method consistently has been to raise new stumbling blocks to the act of voting, such as stricter voter identification rules. Republicans have used a number of other tactics as well, including arbitrarily removing voters from the voting rolls, reducing the number of polling places in minority areas, sending false information to minority voters, imposing strict residency requirements on college students, stationing armed off-​duty police as “voter security” forces around polling places, and in 2020, reducing the number of ballot drop boxes available and blocking the use of mail-​ in ballots.66 The aim of all these measures is to reduce turnout by voters they regard as likely Democrats. As President Trump said of a legislative proposal for funding to ease voting by mail, “The things they had in there were crazy. They had things, levels of voting that if you’d ever agreed to it, you’d never have a Republican elected in this country again.”67 Empirical studies find that these measures have succeeded in many cases in suppressing Black and Hispanic votes.68 The courts have repeatedly found voter-​ suppression measures illegal. Following a Democratic lawsuit against Republican efforts at voter suppression in 1981 (specifically, the use of armed “vote security” squads in New Jersey), the Republican National Committee entered into a court-​approved consent decree with the Democratic National Committee in 1982 agreeing to refrain from such tactics in the future. The decree was updated in 1987 after the Republicans renewed efforts to intimidate Black voters.69 However, the decree expired in December 2017. Republican Party leaders have mobilized voters over themes of racial and cultural identity, finding that these have greater resonance than do themes such as cutting taxes and spending. In fact, as focus groups evaluating the effectiveness of various alternative frames for electoral reform discovered, a rationale for law designed to eliminate “dark money” campaign spending on the grounds that it “stops billionaires from buying elections” wins widespread support. According to the director of research for a Koch-​funded advocacy groups, “Unfortunately, we’ve found that that is a winning message, for both the general public and also

 



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conservatives.” People “found that to be most convincing, and it riled them up the most.”70 Because the conservatives’ economic agenda finds relatively weak popular support, the national Republican Party strategy has been to activate voters against the Democratic Party by appealing to themes of White racial and cultural identity and to limit the ability of Democrats to vote. Recent research has found that over the past 20 years, a Republican majority in state legislatures leads to measures to limit voting rights.71 Republicans further intensified these efforts after the 2020 elections. In January and February 2020, state legislators introduced over 250 measures cutting back early and absentee voting, stiffened voting ID requirements, and even enabling state legislatures to override supervision of vote counting by election boards.72 A law enacted in Georgia went so far as to prohibit people from offering food and water to voters standing in line to vote. Republicans justified these steps with traditional arguments, such as the idea that some voters are more deserving of the franchise than others. An Arizona state legislature observed that “not everybody wants to vote, and if somebody is uninterested in voting, that probably means that they’re totally uninformed on the issues. . . . Quantity is important, but we have to look at the quality of votes, as well.”73 These state-​level lobbying efforts formed part of a national effort by wealthy conservatives to enact legislation throughout the states. In many cases, the bills were written by a political arm of the Heritage Foundation called Heritage Action for America. Organized as a dark money group, it has received substantial funding from the Koch brothers and other wealthy right-​wing interests. The organization provided a template for legislation including a number of provisions designed to reduce voter turnout and intimidate election officials and judges. In 2021, Heritage Action singled out eight key states for close attention, working with local right-​wing organizations to ensure a consistent set of talking points and legislative provisions. According to the head of Heritage Action, the adoption of the same model legislation in multiple states is intended to give it “that grassroots, from-​the-​bottom-​up type of vibe.” The explicit goal of this legislation, she explained, is “to right the wrongs of November.”74 Political mobilization of White racial fears and resentments have shaped most if not all of the policies affecting political and economic opportunity in the United States, and were an explicit feature of Republican strategy from the 1970s onward.75 Splitting the Democratic electoral coalition by playing on White resentment about Black advancement served the interests of the Republican coalition of White voters, large corporations, and conservative funders. They touched a number of sensitive policy issues: criminal justice and incarceration, tax rates, welfare spending, healthcare finance, education, voting rights, and others. Republican positions appealed both to voters opposed to redistributive social

 

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policy and to voters who supported it so long as it did not benefit minorities. By combining the selective provision of public goods and services and social insurance—​as in the distinction between federal responsibility for Medicare and variable state-​set rules for Medicaid—​and selective enforcement of voting rights legislation, Republicans expanded their base. By taking control of apportionment of state and federal legislative districts, adopting restrictive voter eligibility requirements, disqualifying ex-​felons from voting rights, and other measures, Republican expanded their ability to choose their own voters. By rewarding the predominantly White middle-​class constituencies who benefited from Social Security and Medicare programs, lower tax rates, tax-​favored old-​age income and health-​insurance private savings plans, Republicans reduced the redistributive impact of federal fiscal policies. Certainly America’s racial division is not the only factor contributing to the tax cuts, social spending retrenchment, and shift to favor the rights of capital over those of workers, because similar policies have been adopted in many European countries as well over the same period.76 For example, the Reagan revolution is often compared with Margaret Thatcher’s policies in Great Britain. In Germany, similar policies were also adopted but were much more modest: tax cuts came much later than those in the United States and United Kingdom, favored export industries in particular, and left top-​ end personal income tax rates untouched.77 Russia and China, as I will show in Chapters 7 and 8, have resisted progressive personal income taxation and taxes on property, relying more on indirect taxes that incur less resistance from the wealthy. In addition to efforts to guarantee a permanent electoral majority by restricting the ability of their opponents to compete in elections, conservatives working with big business also sought to lock their in their advantages in the judiciary. They mounted a sustained campaign to reshape the composition of the federal courts through appointments of judges and to establish new case law on matters affecting corporate power, such as rules for campaign contributions, employment and labor law, corporate governance, health and safety regulation, advertising, taxation, and antitrust. Conservatives created the Federalist Society, recruiting Robert Bork and Antonin Scalia as its first faculty advisers, to build a cohort of law students, law professors, and judges who would move the federal bench in a probusiness direction. Although they claimed to be restoring an “originalist” conception of the Constitution, they regarded it as part of a “counterrevolution” in the law to undo several decades of rulings about the proper role of government dating to the New Deal.78 Sponsors of a parallel movement called “law and economics”—​a perspective based on the laissez-​faire, efficiency-​oriented ideas of the University of Chicago school—​organized conferences, seminars, research programs, and faculty appointments at universities, aimed at promoting the doctrine that the only

 



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legitimate purpose of the law was to increase social wealth by protecting corporate interests against the demands of labor or society.79 The movement to reshape the judiciary succeeded as Supreme Court rulings increasingly shifted to favor big business.80 The Court’s support for business rose especially sharply after John Roberts was named chief justice in 2005. Scholars have shown that the Court chose to review more cases that lower courts had decided against business litigants, and overturned the lower courts’ rulings more often.81 In a number of areas, the Supreme Court upheld First Amendment claims by corporations against workers’ rights, market regulation, and political spending, a process Justice Elena Kagan termed “weaponizing” the First Amendment, “turning the First Amendment into a sword, and using it against workaday economic and regulatory policy.”82 One of the most important of these areas has to do with government’s ability to regulate spending on electoral campaigns by candidates and parties and contributions to candidates and parties by individuals, corporations, and politically engaged organizations. The question of when and how money can corrupt the democratic process has, not surprisingly, led to sharply divided and inconsistent rulings in the courts about the legality of restrictions on campaign contributions. However, beginning with in 1976, the Court has generally struck down legislators’ efforts to restrict the influence of money in politics through the simple doctrine that money equals speech. In Buckley v. Valeo, the Court held that since the legislature may not restrict speech, neither may it set limits on campaign spending.83 It acknowledged that corrupt influence was a legitimate concern of government but offered no rules to discern when money could be regarded as a vehicle of corruption.84 The Court continued to wrestle with the problem of corruption due to undue corporate power in its decision in FEC v. Massachusetts Citizens for Life (1986)—​which recognized that “concentrated corporate wealth” could make the “corporation a formidable political presence.” Likewise in Austin v. Michigan State Chamber of Commerce (1990) the Court acknowledged the “corrosive and distorting effects of immense aggregations of wealth that are accumulated with the help of the corporate form and that have little or no correlation to the public’s support for the corporation’s political ideas.”85 Twenty years later, however, the Court had shifted rightward, dismissing as invalid any grounds for restricting corporate influence in politics. Indeed, in its decision in Citizens United v. FEC (2011), the Court held that “favoritism and influence” were a perfectly legitimate form of “democratic responsiveness.”86 Corporations enjoyed the same free speech rights as “natural persons.” Following the Citizens United ruling, Super PACs, free to receive unlimited contributions and spend unlimited amounts so long as they were not directly tied to specific candidates’ campaigns, proliferated.87

 

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The exercise of corporate power through heavy political spending in the United States is hard to describe as corruption in a technical sense. But because it works toward the suppression of equal opportunities to participate in political life, it represents a betrayal of the principle of political equality.88 Law professor Richard Hasen argues that the permissive rules on contributions are creating “a system in which economic inequalities, inevitable in a free market economy, are transformed into political inequalities that influence both electoral and legislative outcomes. Without any politician taking a single bribe, wealth has an increasingly disproportionate influence on our politics.”89 He argues that the system of campaign contributions and lobbying should not be termed corruption, because to do so “obscures the fundamental unfairness of a political system moving toward plutocracy.”90 Some Supreme Court rulings have accepted the premise that the influence of concentrated corporate wealth can undermine the integrity of the democratic system. In its 1986 decision in FEC v. Massachusetts Citizens for Life, the US Supreme Court acknowledged the legitimacy of legislative efforts to curb “the corrosive influence of concentrated corporate wealth.” Four years later, in Austin v. Michigan Chamber of Commerce, the Court recognized the possibility that “corporate political expenditures will undermine the integrity of the political process.” As Justice Thurgood Marshall’s majority opinion stated, the state has a compelling interest in fighting a “different type of corruption in the political area: the corrosive and distorting effects of immense aggregations of wealth that are accumulated with the help of the corporate form and that have little or no correlation to the public’s support for the corporation’s political ideas.”91 As late as 2003, the Court allowed that corruption was also fostered when large soft-​ money campaign contributions would make candidates for elective office “feel grateful for such donations.”92 But in 2010, in Citizens United v. FEC, the Court drastically narrowed its definition of corruption in order to rule out all but the most egregious forms of quid pro quo exchange. Now the Court held that “favoritism and influence are not . . . avoidable in representative politics.” When private interests contribute money to influence policy, and politicians favor their side over another, that is democratic responsiveness rather than corruption.93 With Citizens United, the Court decisively rejected both the argument that the state had a legitimate interest in protecting political equality by means of restrictions on campaign contributions and the argument that the undue influence of large contributions could undermine the integrity of the political process. By the Citizens United standard, policymakers have certainly been responsive to politically motivated corporate interests. Although the ruling applied to both private corporations and their political action committees, as well as to trade unions and other interest groups, corporations are by far the heaviest contributors; according to one study, private business spending comprises about

 



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three-​quarters of all political spending in Washington.94 Taking a sample of 1,066 major companies, the study found that their spending rose from $1.13 billion in 1998 to over $2 billion in 2010, in constant dollars. Although companies consistently claim that their lobbying efforts are defensive, intended to prevent harmful government regulations and laws, in fact they see lobbying as a way to increase rents.95 Corporations came to regard their influence over policy not mainly as a way of defending themselves from excessive taxation and regulation, but as a way to increase profits.96 The Chicago school assumed that the costs of government regulation were generally greater than the cost of the harms they sought to prevent. By that reasoning, therefore, firms are defending themselves against harmful regulation when they spend money on lobbying and campaign contributions rather than seeking special favors from government. But this is generally a distinction without a difference. The fact that corporate spending has been steadily rising during an era of antiregulatory ideology indicates that opportunity-​driven spending, that is, rent-​seeking, is outpacing purely defensive spending. Political contributions do in fact yield high returns. Scholarly studies have confirmed that corporate political expenditures are positively related to their stock prices, even controlling for firm size and industry-​specific factors.97 Corporate insider access through lobbying and outsider influence through public pressure campaigns and electoral spending has secured enormous benefits for companies.98 As labor’s political spending has declined, business’s has increased. Business now accounts for more than three-​quarters of total lobbying spending.99 One study shows that during the period of the most intense deregulation of industry, 1978–​86, political spending by corporate PACS almost tripled, rising from $8.8 million in 1978 to almost $25 million in 1986 (in constant 1988 dollars), with the relatively concentrated and ideologically motivated oil industry particularly active.100 Other empirical studies reach similar findings. One finds that firms that lobby have a 1.4% higher return than an equivalent portfolio of investments, and this is above and beyond the return associated with direct contributions to electoral campaigns (lobbying spending is far greater than, but a complement to, campaign spending).101 These findings hold up even controlling for firm size, earnings, assets, R & D spending, and dividends. Another study found significant differences between the United States and the European Union with respect to lobbying. The United States is far more likely to feature clear wins and losses for the contending sides, whereas outcomes in the EU are much more likely to be compromises that accommodate the demands of multiple interests. Moreover, much more than in Europe, US lobbying successes are won overwhelmingly by corporations and organizations representing corporate interests, such as trade and business associations.

 

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In the United States, Christine Mahoney discovered, 89% of corporations and corporate interests that lobby attain full or partial success. The reason is that the American reliance on private political spending to finance electoral campaigns skews the responsiveness of policymakers toward the interests of the wealthiest interests.102 How much actual influence does corporate campaign spending have?103 Although we sometimes focus on campaign contributions, corporate lobbying expenditures considerably exceed campaign spending, and have repeatedly been found to yield significant benefits for company stock prices. Corporate political spending has risen, particularly in the aftermath of the Citizens United decision lifting nearly all limits on corporate political spending. Whereas in the 1999–​ 2000 election cycle, candidate and political party committees raised around $3 billion, in 2016, some $6.5 billion was spent on federal elections and at least another $3.2 billion on lobbying.104 Contributions to political campaigns are heavily skewed; the richest 0.01% of households receive 5% of total income, but make over 40% of the contributions to federal elections.105 Moreover, if we focus solely on legislators and legislation, we overlook the many other ways in which corporations have spent money to shape regulations, policies, and ideological doctrines affecting their interests. Finally, we cannot ignore numerous informal and illegal ways in which corporations divert resources for the benefit of their political allies. These include the use of corporate jets, lavish overseas trips, bulk purchases of a politicians’ book, and donations to favorite charitable causes. And finally, the idea that spending by a small number of corporate PACs accounts for the majority of contributions is misleading. If the concentrated spending of a relatively small number of powerful corporations and corporate political organizations dominates political spending, and if it yields a high return on some of the most fundamental policy issues facing the economy—​tax law, antitrust regulation, labor relations, and spending on public goods—​then the political spending of corporations matters a great deal. After the Citizens United decision in 2010 (and a companion ruling in 2010, SpeechNow.org v. Federal Election Commission, which allowed the formation of super PACs that can spend money without limits on political causes so long as the contribution are nominally independent of candidates), conservative the use of “dark money” rose significantly.106 Labor’s spending and influence have steadily declined, however, as corporate spending and influence have risen. In the 2017–​18 political cycle, business contributed over two-​thirds of all reported campaign contributions, labor just 4% (ideological and other groups contributed about a quarter). Total spending was about $4.1 billion.107 Lobbying efforts are similarly skewed. In 2018 alone, total spending on lobbying was $3.42 billion. Of this, about 1.4% was from labor.108 The author of one study of lobbying based on interviews with corporate lobbyists asked who his respondents considered

 



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their principal opponents on any of the 53 issues he named; not one mentioned a labor union.109 The corporate lobby fought for many years to prevent the federal government from enacting legislation that would have required states to ensure that corporations list their actual beneficial owners when incorporating. As the previous chapter notes, the “limited liability corporation” legal structure, first adopted in 1977, then proliferating in the 1980s and 1990s, allowed businesses to avoid listing their actual owners, gave them the pass-​through tax benefits of avoiding corporate taxes and limited liability protection, and lifted limits on the number of owners. LLCs, along with trusts and other specialized legal forms, allow the wealthy to shelter assets through shell companies and have become a powerful means for hiding the fruits of criminal activity as well as evading taxes.110 The United States’ strong financial secrecy laws coupled with the absence of federal disclosure rules for the beneficial owners of corporations made the United States one of the one of the countries in the world most favorable to allowing corporations to hide their activities and evade taxes.111 As other democratic countries tightened rules requiring disclosure of the actual owners of companies, the United States came under increasing pressure from the Financial Action Task Force and other international bodies to fight money-​ laundering by international terrorists and criminal syndicates.112 However, the US Chamber of Commerce, the Heritage Foundation, and other probusiness groups have strongly resisted legislation to require transparency in the registration of the actual owners of corporations. Eventually, the financial industry came to acknowledge the need to adopt federal legislation to require uniform rules for disclosure of beneficial owners.113 Big business slowly came around as well and grudgingly backed reform. In 2019 a bill requiring the disclosure of the “ultimate beneficial owners” of companies passed the US House of Representatives. As of summer 2022, however, the rule to this effect proposed under the Corporate Transparency Act had still not been incorporated into law.114 Corporations not only seek rents from favorable regulation, but demand protection from the consequences of business failure as well. The savings-​and-​ loan crisis of the 1980s is an example. Deregulation of the thrift institutions encouraged their owners and managers to make risky investments using depositors’ money in the knowledge that the deposits were guaranteed by federal deposit insurance. This was at odds with the declared position of the Reagan administration. The president’s economic report to Congress in 1986 called for further deregulation of banking and rejected the argument that it was deregulation that had brought about the massive S & L crisis in the first place. It did state, however, that “shareholders and managers of financial institutions should be made to bear—​promptly and effectively—​the good and bad consequences of the operations of the institutions they own and control.”115 But this of course did

 

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not happen. Both in the S & L crisis and in the deeper financial crisis two decades later, the federal government absolved owners and managers of any civil, criminal, or economic responsibility for the disastrous mistakes they had made. The very concentration of banking assets that government encouraged through its antipathy to antitrust resulted in a situation where major banks had become “systemically important”—​meaning that their failure would bring about a collapse of the entire financial system—​and therefore “too big to fail.” Far from assuming any financial or criminal liability for their actions, those who benefited from the massive government subsidies to the failed financial institutions profited from their failures and shifted the costs to the public.116 The court rulings equating speech with money and equating the rights of corporations as juridical persons with those of natural persons have ignored a more basic rule for determining the constitutionality of restrictions on political contributions and spending—​the principle of political equality.117 They have given judicial sanction to the conversion of inequality of wealth into inequality of political influence.118 By lifting restrictions on corporations’ right to flood the political arena with money, these rulings set in motion a self-​propelling ratchet effect of increasing political spending. Most basically, the corporate-​conservative movement sought to restrict the political rights of voters while expanding those of corporations. Over the last four decades, the racial injustice that gave rise to the political barriers against political equality in the Constitution has reappeared as a result of the alliance of conservative and corporate interests to curtail political equality for the sake of protecting the power of large corporations.

5.2.  Privatization of Public Goods A consequence of the alliance of wealth and power is the hollowing out and privatization of public goods. These processes widen inequality further, since public goods and services such as education, healthcare, and public safety have historically lowered barriers to opportunity. As Heather McGhee puts it, often government would rather “drain the pool” than to provide equal opportunities to all, especially when doing so requires Whites to share public goods with Blacks.119 Her reference is to the spate of decisions by southern cities, following federal court rulings to desegregate public recreational facilities, to drain city swimming pools rather than to open them to Black citizens. Since the late 1970s, opposition to an inclusive conception of the public good has been wrapped in the mantle of an ideological conviction that privatization and markets are ipso facto preferable to government provision and regulation. Conservatives no longer invoke the sacred rights of property in a defense of slave-​holding, but they still claim that private property will preserve both efficiency and freedom in the face of oppressive government. A major difference between the politics of draining

 



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the pool as opposed to privatizing it is that privatization gives private companies the opportunity to collect monopoly rents, a portion of which they can return to the politicians granting them the exclusive right to sell their services.

5.2.1.  Education Education is a clear case in point. In the name of expanding “school choice,” states have been cutting public funding for K-​ 12 education and public universities in favor of revenues from lotteries, tuition tax credits for private schools, and vouchers. Every state has now enacted legislation allowing home schooling, leading to an increase in age-​specific enrollment in private and home schooling.120 Although the percentage of pupils enrolled in private schools fell slightly, from 11.7% to 10.2%, from the mid-​1990s through 2017, the percentage in home schooling nearly doubled, from 1.7% to 3.27%, in the same period.121 Meantime, the growing use of lottery funds for public education rather than public funds has also deepened inequality because, in practice, those buying lottery tickets tend to have lower median incomes than those receiving the scholarship funds.122 Similarly, again in the name of school choice, nearly all states have adopted laws authorizing the creation of state-​funded charter schools to serve particular purposes and populations. Although there is a significant debate over the degree to which charter schools on balance work to improve the quality of public education, there is no question about the fact that they have spread rapidly. As of 2000–​2001, fewer than 1% of all K-​12 students were enrolled in charter schools, but by the 2017–​18 school year, they enrolled 6% of all students. They accounted for 7% of all public schools as of 2017–​18, compared with 2% in 2000–​2001.123 Although the controversy over the degree to which charter schools improve the quality of public education continues, in one respect they have been unambiguously effective—​generating profitable investment opportunities for real estate developers, hedge funds, and private-​equity firms. Thanks to the tax credits granted to investors in underserved communities, real estate developers and charter school organizations have qualified for substantial federal, state, and local tax credits, while collecting interest on loans to local governments. The compounded annual return can be as high as 10% or more. As with other cases where the privatization of public goods transfers a large part of the investment risk to the public while enabling private interests to realize high profits, charter schools have attracted very high levels of private investment.124 For right-​wing ideological groups such as ALEC and the Koch brothers network, the charter school movement has the additional benefit of weakening teachers’ unions.125 Altogether, the school choice movement has had a significant impact on the distribution of enrollments. While in 1999, 74% of students attended public

 

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school in the district to which they were assigned by residence, by 2016 this figure had fallen to 69%, whereas the number attending public schools of their families’ choice, such as magnet schools and charter schools, had risen from 14% to 19%.126 Conservative organizations such as ALEC have been powerful advocates for the diversion of resources out of public education. One means states have used is tax incentives favoring contributions to private K-​12 education. Often using ALEC’s templates for legislation, 17 states have enacted private school tuition credits.127 These permit families to make a donation to an approved scholarship organization that passes on the money to the private schools of the families’ choice, nominally for the purpose of providing tuition scholarship assistance for pupils who might not otherwise be able to afford private school tuition. One effect has been to encourage White-​flight private schools, athletic recruitment at private schools, and other uses of the funding that do not expand educational opportunity for the disadvantaged. In states such as Georgia, a provision in the authorizing legislation made it illegal even to monitor how the funds are used. The benefits for families are attractive, however, since the donations not only are deductible from federal taxable income, but carry a tax credit from the state; in effect, they divert tax revenue from public to private schools. Georgia’s program is not means-​tested, so that it can benefit families at any income level; many of the schools receiving the funds are not accredited; about half the schools receiving the funds are 90% or more segregated; and audits of the use of the funding are not permitted.128 These programs have proven to be particularly popular in the South, where nine states have enacted state voucher or tuition tax credit programs to fund private schools. Across the country, in the 2013–​14 academic year, nearly $1 billion was transferred from state budgets to private schools through these programs.129 In higher education, reduced state budget funding for public universities and steadily rising tuition and fees at both private and public institutions, coupled with the stagnation of median incomes, have placed an ever-​greater strain on the ability of middle-​class families to finance a four-​year education for their children. Figure 5.2 shows the divergence between education costs and median incomes. As a result, more and more students have been unable to afford higher education, and certainly without taking on large student loans. Since 2006, outstanding student debt more than tripled, doubling its share of GDP from 4% to 8%.130 The huge increase in student loan debt (now totaling around $1.5 trillion), in turn has made possible the substantial market for securitized student debt, discussed in the next chapter, from which investors profit. Another effect is to block poorer and middle-​class students out of four-​year higher educational institutions and to make it increasingly difficult for those who do attend to complete their degrees. Data from the Pell Institute indicate that while

 



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Average cost of higher education, tuition, fees and room & board Real personal median income 1972–2020

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College costs in constant 2020 $, income in constant 2019 $ Source: College Board [https://research.collegeboard.org/trends/college-pricing] FRED St. Louis [https://fred.stlouisfed.org/series/MEPAINUSA672N]

Figure 5.2:  Higher Education Costs and Median Incomes, 1972–​2020

students from families in the bottom income quartile have been starting college in growing numbers (fewer than 30% of the cohort attended college in 1970, while by 2018, slightly over half did), few succeed in finishing a four-​year degree by age 24—​the completion rate has hovered around 12% for the last 50 years). Meanwhile, for students from the top income quartile, over three-​quarters of whom attend college, completion rates have fallen, from 42% to 52%.131 The high price of college has affected students from middle-​income families especially. Typically unable to qualify for student financial assistance packages because their family income is too high, most are unable to afford college without assuming high levels of debt. The wealthiest families can pay for the best-​quality private education from pre-​K through college, while poor and middle-​class families depend on public education and the strained scholarship resources of private schools. In education, as in much else, privatization of public goods widens both current and future economic inequality. The pro-​market, antigovernment language used to justify privatization in education—​such as parental choice—​serves the interests of private providers such as for-​pay vocational colleges luring students to take out loans by making fraudulent claims about their job placement rates, and lenders benefiting from the favorable terms set by federal law (such as the rules making it nearly impossible for students to discharge loan debt through bankruptcy).132

 

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5.2.2.  The News Industry Similar effects from the privatization of formerly public goods and services are even evident in private sector domains that serve a public function, such as the news media.133 To be sure, news organizations have never been organized as a public good. With few exceptions, they are run as for-​profit businesses. Nevertheless, for a long time, courts have recognized that news organizations are not only commercial entities, but also serve a crucial function in a democracy. In its 1945 decision in Associated Press et al. v United States, 326 U.S. 1, the Supreme Court observed that the First Amendment “rests on the assumption that the widest possible dissemination of information from diverse and antagonistic sources is essential to the welfare of the public.” In striking down the AP’s restrictive contractual terms, to be sure, it did not go so far as to endorse the “public utility” theory propounded by Judge Learned Hand and Justice Felix Frankfurter that a commercial news organization plays a special role in society. Frankfurter quoted Hand as writing that a news organization “has a relation to the public interest unlike that of any other enterprise pursued for profit. A free press is indispensable to the workings of our democratic society. The business of the press, and therefore the business of the Associated Press, is the promotion of truth regarding public matters by furnishing the basis for an understanding of them. Truth and understanding are not wares like peanuts or potatoes.”134 In his decision on the case at the district court level, Learned Hand had written that the newspaper industry serves one of the most vital of all general interests: the dissemination of news from as many different sources, and with as many different facets and colors as it is possible. That interest is closely akin to, if indeed it is not the same as, the interest protected by the First Amendment; it presupposes that right conclusions are more likely to be gathered out of a multitude of tongues, than through any kind of authoritative selection. To many this is, and always will be, folly; but we have staked upon it our all. 135 The Court’s 1945 decision instead decided the case on the grounds that the AP had violated the Sherman Act’s prohibition on restraints of trade, and rejected the argument that it was protected by the First Amendment. Still, the Court’s decision sought to protect both the freedom of the press and the interest of society in obtaining information from a diverse range of perspectives. As the Court of that immediate postwar era well understood, privately owned for-​profit news organizations contributed to a crucial positive externality for a democratic society: they expand our shared awareness of matters of public

 



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interest and therefore offer a measure of political accountability for those with power. The Hutchins Commission, formed during World War II at the initiative of Henry Booth Luce to study the role of the press in a democratic society, issued a famous report in 1947 outlining three major threats to the principle of press freedom: the advances in technologies of mass communications that had allowed totalitarian governments to wield destructive power through the manipulation of information; the amassing of large concentrated market power on the part of media companies; and the potential that these would provoke an overreaction on the part of the government in the form of regulations and controls that would destroy press freedom itself. The solution, the commission concluded, was to recognize that the principle of press freedom must be balanced against a recognition by the press of its responsibility to society. Its role must be that of a “common carrier of information and discussion” and a “trustee” of the public interest. If the press was unable to perform the functions necessary to society, it not only would relinquish its moral right to enjoy press freedom, but also was likely also to provoke a reflexive response by government.136 A similar vision was embodied in the professional codes of ethics such as those adopted by the American Society of Newspaper Editors and the Society of Professional Journalists. Reflecting the same belief that a diversity of views was necessary to ensure a free flow of information and opinion, the federal government subjected the broadcasting industry to formal government regulation similarly intended to protect freedom of expression while enforcing the media’s social responsibility. Under the fairness doctrine, established in 1949, broadcasters were considered “public trustees” and were required to present at least two sides to each issue as a condition for receiving a federal broadcasting license.137 The Supreme Court had ruled that since the public owns the electromagnetic spectrum, the federal government had a right to allocate specific broadcast frequencies to radio and television broadcasts. Therefore, as a condition for receiving or renewing a broadcast license, the company had to demonstrate that it was presenting at least two sides to issues of public contention. As with so many of the other policy trends that have exacerbated economic inequality discussed in this book by hollowing out and privatizing public goods, the public consensus about the role of news organizations in a democracy prevailing in the aftermath of the world war vanished, and with it the notion that the news media were trustees of the public interest. Laissez-​faire doctrines of the primacy of property rights, freedom of contract, and freedom of the press replaced the older view that government should protect the country’s interest in media pluralism. Legal challenges to the fairness doctrine on First Amendment grounds gained ground in the courts and Congress in the 1970s and 1980s. Political support for the fairness doctrine declined. In 1987 the FCC suspended

 

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it. Right-​wing talk show hosts such as Rush Limbaugh immediately took advantage of the opportunity to sell their syndicated programs to radio stations throughout the country. Eventually, in 2011, fearing that Congress might enact legislation on the issue, the Obama administration repealed the rule altogether.138 Certainly multiple forces have undermined the role of the news media as trustees of the public interest. These include the growth of digital technologies, which threaten the financial viability of print newspapers by driving the cost of disseminating information and opinion to mass audiences to nearly zero, while the cost of gathering and editing news content continues to rise. Print media cannot recoup in advertising and subscription costs the expense of news reporting when much of their commercial and classified advertising business has moved online. Financialization of the economy has meant that, like many other sectors, the news media are being taken over by the financial industry. The growing strength of the right-​wing ideological movement has also worked to undermine the former model of privately owned news organizations exercising their freedom on behalf of the public good. Whether driven by simple rent-​seeking motives, ideological reasons, or a mixture of the two, financial firms such as Alden Global Capital and media firms such as the Sinclair Broadcast Group are wrecking news organizations—​ Alden mainly in the print newspaper sector, Sinclair in radio and television. As of 2018, Sinclair owned 192 TV stations in 89 markets, pushing out a heavily conservative, pro-​Trump diet of editorial content to its local stations.139 The MediaNewsGroup (which does business as MNG enterprises and Digital First Media), owned by Alden Global Capital, is the seventh largest newspaper chain in the United States. It owns and operates 40 daily newspapers plus around 65 nondailies as well as four radio stations and a television station.140 Although Alden is commonly labeled a hedge fund, it behaves like a private-​equity investor. When it takes over a news organization, it borrows heavily against the assets of the company, then slashes its operating costs to the bone—​meaning massive layoffs of journalists and editors—​while retaining the flow of advertising revenue for as long as possible. Typically, the newsroom bleeds reporters long before the newspaper formally ceases operations. At that point, the owner sells the remaining assets at a discount to shed the debt.141 These are tactics similar to those discussed in Chapter 4, describing how PE investors who take over nursing homes skim off the cash flow from Medicare, Medicaid, and insurance companies while cutting nursing staff to lower operating costs. While a number of private investors have found profits in the declining but still cash-​ generating newspaper industry (including Apollo Global Management, Fortress Investment, and Chatham Asset Management), Alden is particularly notorious. Its reputation was not improved when it was discovered in 2019 that it had diverted some $250 million from the pension funds of news industry workers

 



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in the newspapers it had acquired into its own investment accounts, two of them offshore.142 Deregulation policies, by encouraging concentration of ownership and control in the media, have encouraged such predatory behavior.143 The ability of Sinclair and similar organizations to flood hundreds of local markets with right-​wing editorial content was facilitated by the lifting of the fairness doctrine in 1987, which, together with the spread of cable television, also enabled Rupert Murdoch to build the Fox News Channel, founded in 1996, into a powerful force. Fox’s strongly right-​wing ideological agenda is congruent with that of other media properties owned by Murdoch’s NewsCorp, such as the Wall Street Journal. The populist, antitax, anti-​immigration Tea Party movement’s rapid emergence owed much to the intensive and favorable coverage it received from Fox News and right-​wing social media sites.144 Fox not only covered the movement, it actively coordinated it.145 The combined influence of Fox News, the Wall Street Journal, right-​wing talk radio, and right-​wing social media sites in disseminating a coordinated, concerted diet of slanted coverage, half-​truths, conspiracy theories, and outright falsehoods reinforce the echo chamber effect.146 One result of the increasingly concentrated ownership and editorial control of the news media is to reinforce ideological homogeneity in opinion and information within communities of the like-​minded, while walling them off from discordant opinion and information—​an ideological sorting that parallels the geographic sorting already discussed. The loss of journalistic organizations devoted to coverage of news of common interest is driving people to sources that allow them to reinforce their prior convictions. This is one reason for the deepening political sectarianism in the United States, which scholars have defined as “the moralized identification with one political group against another.”147 People also seek out congenial content from internet media and social media sources. These audiences are highly homogeneous. Like much else this book has discussed, the consumption and dissemination of material from online sites follows a strong power-​law distribution. A study of the dissemination of fake news on Twitter during the 2016 presidential election campaign found that 1% of consumers accounted for around 80% of all exposures to fake news and that only 0.1% accounted for all the sharing of fake news—​they were the political equivalent of superspreaders. They were extremely active; the median superspreader sent out references to between seven and eight sites per day and in turn was exposed to nearly 4,700 political sites each day. The sites they followed overlapped closely and overwhelmingly represented the Far Right on the political spectrum. Those who identified themselves on the extreme right were far more likely to follow and disseminate fake news; indeed, for them, fake news sites comprised nearly two-​thirds of their media exposures.148 The civic role of the news media is also being corroded by their growing dependence on the large digital platform companies for dissemination of the news

 

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content that they produce. Platform companies, particularly Google, abuse their market power with respect to news organizations in several ways. A news organization that wishes to use Google’s search engine must adopt its “accelerated mobile pages” standard, which gives Google control not only over the news content of the publisher, but also over user data. Second, the platform companies carry news digests of the content produced by media organizations without paying license fees, usage going far beyond the limits of “fair use,” while antitrust law prohibits the publishers from bargaining collectively to receive equitable terms for the use of their content. More insidiously, the business model of the platform companies demands domination of the “attention economy.” Sophisticated algorithms select content that maximizes user engagement, to the detriment of news stories that give priority to accuracy and depth over half-​ truths and falsehoods. As one expert put it, news organizations have become “sharecroppers” on the industrial farms of the giant platform companies.149 Antitrust law that conceives of the social welfare effects of the digital platform companies’ market power solely in terms of the low price of information for consumers, while ignoring the threats they pose to individual political and economic freedom, does a serious disservice to democracy. Paradoxically, however, now that public opinion on the right as well as the left has been aroused against their power over the flow of information, both Democrats and Republicans are coming to support vigorous enforcement of antitrust against the giant platform companies.150 The subjection of the American news media’s role as trustee of a public trust to the complementary interests of right-​wing political activists and financial corporations bears disturbing parallels to the Russian and Chinese media in recent decades. In both, major business conglomerates own lucrative media properties, and in both, the regimes have pushed the content of information firmly toward supporting the regime. In both, broadcast news organizations are state-​owned and supply the public with an exclusive diet of pro-​regime content. And in both, independent news outlets, including online publications, have almost entirely been suppressed. By contrast, the German news industry, long more heavily regulated than the American, has continued to reflect the society’s interest in the independence and pluralism of journalism.151

5.2.3.  Criminal Justice A third example of the way privatization of public goods has deepened inequality is the system of mass incarceration. To a growing degree, the United States has outsourced responsibility for running its federal and state prisons to private for-​profit companies. More broadly, as Michelle Alexander has convincingly argued, the penal system in America operates as a comprehensive mechanism

 



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for reproducing racial power inequalities by imposing disproportionately harsh punishments on a predominantly Black population through arrests, incarceration, and criminal supervision—​often leading to lifetime disenfranchisement.152 Consequently, as the political strategy of the Republican Party to win votes by playing on voter fears of Black criminality resulted in electoral successes for the party, and raised the national incarceration rate threefold in the 1980s and 1990s, it had the dual effects of reinforcing White social power and creating profit-​making opportunities for private investors.153 The expansion of incarceration is particularly marked for the federal prison system, which, among other things, hold individuals convicted of drug-​related crimes (Figure 5.3). The rapid growth in incarceration directly resulted from the tightening of criminal penalties for minor crimes, particularly drug-​related offenses, and more permissive rules for policing.154 As the number of individuals subjected to incarcerate skyrocketed and voters rejected state bond referendums to build more prisons, prisons grew severely overcrowded. For example, the number of prisoners in South Carolina rose 33% from 1989 to 1993.155 Higher incarceration rates and overcrowding in turn generated opportunities for private companies to earn profits from privatizing incarceration. An act of Congress in 1979 ended the ban on interstate commerce in goods made by prisoners and Incarceration rate per 100,000 population 1980–2016 500

Total

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Source: Gunderson, Anna, 2020, ‘Replication Data for: Why Do States Privatize their Prisons? The Unintended Consequences of Inmate Litigation’ [https://doi.org/10.7910/DVN/WRHPXL, Harvard Dataverse, V1, UNF:6:9GPs0TkYSMUEBDDf H1rA1g==[fileUNF]

Figure 5.3:  Incarceration Rates, by Type of Facility, 1980–​2016

2020

 

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allowed federal prisoners to be incarcerated in private facilities.156 The first private state prison opened in Kentucky in 1986, and the first contract at the federal level for private imprisonment took effect in 1997.157 The number of privately imprisoned persons rose rapidly thereafter. From 2000 to 2016 alone, the population of those in privately owned and run prisons rose by 47% (and those in private immigrant detention facilities rose 442%).158 About 8% of prisoners are now held in private prisons. As in many other industries where public goods have been privatized, the early promise of cost savings from competition has been lost. Two companies together now (as of 2016) control 85% of all private prison beds.159 In a few states, a single company owns all private prisons. Private prisons are a profitable business, in part because, as in other industries where private companies have taken over the provision of public services, they earn profits by cutting labor costs. For example, they replace experienced and skilled guards with low-​wage, low-​skill personnel. Although the champions of the private prison industry claim that they are trimming waste and fat, considerable research indicates that in fact they do not save taxpayers any money in the long run.160 Likewise, despite the industry’s claims that it is helping rehabilitate prisoners by offering job training and internships, the evidence suggests that those released from private and public prisons have similar recidivism rates.161 Privatization also creates opportunities for rents from other services related to incarceration, such as making telephone calls. In 39 states, the prison system contracts with telephone service providers and receives a commission on each phone call. Calls can cost as much as $1 per minute, generating large profits for the providers and a stream of rents to the prison, but imposing severe hardships on the families of prisoners. Both state-​owned and private prisons use this system, estimated to generate about $1 billion annually in revenues.162 Although federal prisons ended the practice, the vast majority of prisoners are in state prisons, most of which have privatized telephone services. Price gouging is driven not only by the ability of prisons to extract rents from phone calls, but also the market power of the two providers that dominate the industry, Securus Technologies and Global Tel Link. A former commissioner of the FCC called it “the clearest, most glaring type of market failure I’ve ever seen as a regulator. It’s not uncommon to see rates as high as $24 for a 15-​minute call.”163 From the standpoint of society, keeping prisoners connected to their families brings a positive good, but for both public and private providers of monopoly services, prison communications is a profitable business opportunity. Incarceration is also bound up with other aspects of inequality and therefore with geography. Like other dimensions of social advantage and disadvantage, incarceration rates vary extremely widely across states. Combining incarceration, probation, and parole, per 100,000 population rates vary more than sixfold across the states.164 In a regression equation, the strongest predictors of

 



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state incarceration rates are the Black percentage of the population and the state’s median earnings. Together, these explain over half the variation in incarceration rates across states. Yet even after controlling for these factors, some states have far higher actual incarceration rates than would be expected; among these are Mississippi, Louisiana, Oklahoma, and other states in the Deep South (Figure 5.4). Racial inequality remains imprinted in the legacy of unequal criminal justice across states. As with healthcare, education, and the news media, so also the privatization of criminal corrections deepens inequality both directly and indirectly. It allows private providers to capture rents by cutting spending on workers whose services provide a public good, whether this be education, health, or prison guards. In the case of the criminal justice system, privatization of prisons has been part of a broader movement to lock a growing percentage of the population in a lifelong condition of penal supervision. The economic and social inequality these trends reinforce then divides society further across lifetimes and generations, as those with the advantage of a comfortable upbringing, good schooling, access to healthcare, and White skin pass those advantages along to the next generation. Meantime, disadvantages of birth deepen and accumulate as well. Many other commonly shared services in American society have been subjected to the same forces of hollowing out and privatization: transportation, libraries, parks, water, sanitation, food, and water safety. The long-​term Adult incarceration rates, per 100k adults, by state, 2018, actual vs. predicted model controls for median income and Black population share, 2016 States above the regression line have higher incarceration rates than predicted by the model 1500

OK

LA

Actual incarceration rates

r-sq = .544; sig = 0.0000 GA KY

1000 VA

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CT NJ MA

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TX AZ TN SD ID IN MO FL NV WI KS NM DE PA OH SC MT WV MI NC OR NE IL IA

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Predicted incarceration rates Source: US Bureau of Justice Statistics, table cpus1718at01.csv, Number and rate of persons supervised by adult correctional systems in the U.S., Income from US Census Bureau, PUMS [https://www/census.gov/programs-surveys/acs/microdata.html]

Figure 5.4:  Adult Incarceration Rates by State, 2018, Predicted versus Actual

 

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deterioration of many public services further deepens inequality in living conditions and political outlooks. Those who can afford to live in high-​quality environments lead lives increasingly separate from those who cannot. Outsourcing the provision of public goods widens inequality of opportunity. Privatization enables for-​profit companies to choose how best to maximize rents from administratively granted privileges. They can raise return on assets by reducing the quality of services offered to the broad public, for example, by cutting spending on staffing, training, and services. Or they can offer high-​quality service to a narrow segment of higher-​income customers, as in gated communities with private security forces, concierge medical care, private education, and dedicated toll lanes on highways, so too in the justice system, those who can afford it hire the best lawyers to defend them in criminal proceedings. Those with both money and connections can even seek “concierge justice” by paying for presidential pardons.165 In multiple ways, the hollowing out and privatization of public services tend to hollow out the provision of public goods and bifurcate the use of those services between the poor, who have access to the lowest-​quality version of them. Because these inequalities are embedded in physical places as well as across social divisions, they deepen and replicate themselves across lifetimes and generations. Perhaps the most pernicious cases have occurred when state and local governments have chosen to withhold public goods entirely rather than to make them available to Blacks and Whites equally. As Heather McGhee argues, racism has long kept us from providing public goods and services that would benefit Whites and Blacks equally, which in turn has had effects that harm Blacks disproportionately.166 There are many examples, particularly from the era of desegregation. When a federal district court ruled in 1959 that Montgomery, Alabama, must open its public swimming pool to all rather than restricting it to Whites only, the city drained the pool and closed the entire department of parks and recreation. Some years later the city reopened the parks, but never reopened the pool.167 The state of Virginia closed all public schools in Front Royal, Charlottesville, and Norfolk in 1958 rather than be forced to integrate them; this move enjoyed the support of public choice theorists such as James Buchanan, who argued instead for the full privatization of education.168 As Nancy MacLean observes of these ostensibly race-​neutral theorists, their belief in White supremacy underlay their faith in the sovereignty of property rights.169 The right-​wing ideology that privatization is the solution to problems of economic justice has joined forces with the fears of many Whites of being outnumbered by non-​W hites to produce passionate populist support for figures such as Donald Trump.170 I will discuss the effect of inequality on political polarization further in the final chapter.

 



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Privatization of public goods always has distributive consequences. Notwithstanding the Coase theorem—​that the initial distribution of property need not lead to lasting inefficiency so long as property rights and freedom of contract are secure and the costs of reaching bargains are low—​in the real world, the reciprocally beneficial alliance of those with property and those with power can ensure that an initial distribution of property following privatization yields enduring inequality. Today’s movement to privatize public goods is the contemporary version of the enclosures of the commons in England. For hundreds of years following 1217, the same year as the Magna Carta, the Charter of the Forest gave the commons legal protection as a form of property serving the public good. Among other things, it granted access by ordinary people—​ commoners—​to use of the natural resources on common land in order to earn a living, guaranteed poor widows a right to subsistence, and prohibited the abuse of the resources.171 Enclosures of the commons over time brought about a high concentration of landholding and pauperization of large parts of the population. The notion of commonly held land as a legitimate form of property enjoying property rights protection and serving the public interest was forgotten. Only private property was to enjoy property rights protection. America’s history of property rights absolutism is sordid, since it formed part of the ideology of White supremacy and segregation. The resuscitation of the belief that the extension of property rights will bring economic and political freedom rests more on ideology, therefore, than a frank acknowledgment of the facts of history.

5.3.  Conclusion: Labeling the Union of Wealth and Power The union of wealth and power in Russia and China is often characterized by labels such as crony capitalism, oligarchy, plutocracy, and kleptocracy.172 Increasingly the same terms are applied to the United States as well, by both the Left and the Right.173 This language is rich with opprobrium. For example, on the second day of the Paul Manafort trial in August 2018,174 federal judge T. S. Ellis III instructed the prosecution and defense to stop using the word “oligarch” in referring to Russian tycoons such as Oleg Deripaska (who paid Manafort substantial sums for providing intelligence about the Trump campaign). Rather, refer to Manafort’s wealthy clients, the judge ordered, as “the people who financed the campaign.” Judge Ellis said that the term oligarch was “pejorative” and carried criminal connotations that suggested Paul Manafort “associated with despicable people, and therefore he is despicable.” “That’s not the

 

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American way,” Ellis added.175 “Oligarch is just despotic power exercised by a privileged few,” Ellis declared, and asked rhetorically whether it would be fair to refer to “Mr. Soros” and “Mr. Koch” as oligarchs. He then answered his own question: “But we wouldn’t call them oligarchs.”176 The pejorative associations of the term “oligarch” arose again in a recent case involving a Soviet-​born billionaire named Vladislav Doronin, who bought a plum piece of property in Aspen, Colorado. Doronin threatened to sue a local newspaper in Aspen after it referred to him as an “oligarch.” As Doronin’s lawyers explained, “Oligarchs are not merely wealthy individuals of Russian origin; they are individuals who have amassed their wealth through the exploitation of Russian natural resources, corrupt direction of Russian state-​owned enterprises, and close political affiliation with Vladimir Putin.” Since this characterization did not apply to Doronin, the lawyers argued, referring to him as an oligarch was defamatory.177 The term “crony capitalism” was traditionally applied by the Left to refer to the deep embrace between capitalists and government (although some socialists objected that it was redundant to speak of crony capitalism since capitalism was cronyistic by nature). For a short time, American conservatives made use of the term after Barack Obama was elected president in 2008. They argued that Obama’s efforts to bail out industries failing due to the 2008–​9 financial crisis amounted to an effort by Democrats and big corporations to interfere with the natural workings of the market.178 After Donald Trump was elected, Republicans largely dropped this line of argument.179 Libertarian economists, such as Luigi Zingales at the University of Chicago, continue to apply it to the United States: When the primary concern of a startup is to devise a strategy to milk money from taxpayers—​indeed, when a new company refines its lobbying strategy even before it defines its market strategy—​it means that crony capitalism has corrupted American society. A subsidy-​driven market selects not the firms most efficient at producing but those most efficient at sucking up public resources. How did the land of opportunity become the land of rent seekers?180 There have been many simplifying labels for the relationship between big business and government in America. In the 1950s, sociologist C. Wright Mills wrote of a “power elite” comprising the top echelons of government, business, and the military working in close concert.181 Political scientist Floyd Hunter, studying the distribution of policymaking power in Atlanta, referred to the confluence of social, economic, and political power there as “oligarchy.”182 Later, pluralist scholars, led by Robert Dahl, applied careful empirical methods to the flow of decision-​making over major policy issues in New Haven, Connecticut,

 



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and found that political influence was dispersed across diverse organized groups without being concentrated in a single body of individuals.183 Note that Hunter studied a southern city with a heritage of racial segregation, corporate paternalism, and social hierarchy, whereas Dahl studied a New England city. Dahl argued that from the late 18th century until almost the middle of the 19th century, New Haven was dominated by an oligarchy consisting of a narrow set of patrician families who monopolized social, material, and political power, but that from the 1840s on, power grew dispersed by industrialization and waves of ethnic immigration.184 To speak of an alliance between conservative politicians and big-​business interests is not to say that there is a single “power elite.” Nor is it to say, with Karl Marx, that “the executive of the modern state is but a committee for managing the common affairs of the whole bourgeoisie.”185 In the United States there was no informal pact between a president and a handful of billionaires, as there was in Russia in 1996 when Boris Berezovsky brought together a few fellow tycoons to ensure Boris Yeltsin’s reelection in return for a share of power in government (see Chapter 7 for more details). To use terms such as alliance or union in the case of the American political system is to simplify a far more complicated set of relationships. On both sides are multiple actors with their own interests, often competing with one another, and often contending over issue positions, but sharing a set of broadly congruent interests. Their relationships can be individual or collective, small scale or broad, formal or informal. No single overarching organization unites all politicians or all corporations, although wealthy right-​wing interests do work hard to pool the resources of donors, policy experts, legislators, and others and channel them for political influence.186 Although no label perfectly represents the relationship between powerful corporate interests and the politicians that help them to sustain their economic power, the term “alliance” is as good as any. Rather than a formalized statement between two sides, alliance refers to a wide range of efforts aimed at achieving an understood set of ends. The term “alliance” helps to underscore two points: first, that the relations between the economic groups benefiting from the current arrangements and the political officials that maintain those arrangements are based on reciprocity and exchange, rather than a one-​sided takeover by big business. Second, the partners in this alliance share an interest in excluding challengers. The dynamics in the relations between big business and the Republicans are illustrated in the story of the rise and fall of the “K Street project.” In 1994, the Republicans won a majority in the House of Representatives and the Senate. Their new leaders then sought to extend Republican Party power over the corporate interests that supported them by mounting a campaign named for the K Street area in Washington, DC, where the lobbying organizations were concentrated. The project’s goal was to ensure lasting single-​party control of

 

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the Congress and the White House by subordinating the powerful corporate interests and trade associations to Republican Party control. Among other things, the Republican leaders demanded that lobbying firms would only hire Republicans favored by the House and Senate leadership into senior positions in their organizations. The Republicans demanded that the contributions to congressional campaigns provided by lobbyists, which had traditionally been divided rather evenly between the Republican and Democratic Parties, now go exclusively to the Republicans. By the early 2000s, about two-​thirds of corporate contributions went to the Republican Party. The party was even able to force the lobbies to back some of the party’s legislative initiatives against their will. Until the Republicans lost their majority in both chambers in 2006, the party had succeeded in reversing the traditional dependence of the party on the resources of powerful lobbies and harnessed them to its own far-​reaching legislative agenda.187 Then, with the Republicans having lost their majorities in the Congress, the corporate lobbies shook free of Republican Party control and resumed their traditional practice of contributing to both parties. The relationship reverted to one based on exchange, rather than a capture of big business by the party. The KStreet episode showed that Republican Party could not long subordinate the power of the corporate lobbies to itself; the network of corporate interest, conservative advocacy groups, and wealthy donors maintained its autonomy. They could, for example, target key Democrats wielding pivotal votes in an evenly divided Senate.188 Whatever frictions arise in the relations between Republican politicians and the conservative business interests from whom they draw their support, they firmly share a common agenda: among them restricting electoral rights for presumed Democratic voters and opposition to higher taxes and redistributive spending. In recent years, tensions of a different sort have arisen, as some of the most extreme populist elements in the party have condemned “woke” corporations for opposing their culture war agenda.189 Extreme elements within the Republican Party have succeeded in pushing the party rightward by threatening to “primary” moderate candidates, sometimes even at the cost of losing some winnable races.190 Some extremist candidates lose in the general election to more moderate Democrats.191 A case in point is Christine O’Donnell in Delaware, who won an upset victory against a popular incumbent Republican senator in 2010 only to lose in the general election to a moderate Democrat.192 Still, over the past decade, extremists among the Republican candidates have succeeded in expelling nearly all moderates out of the party’s corps of elected officials. Some believe that responsibility for the problems of inequality and polarization in America is shared equally between the Right and the Left, Republicans and Democrats. These arguments take several forms, but they view the Right and Left as mirror images of one another. For example, political theorist Michael

 



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Sandel argues that our present problems are the joint outcome of policies pursued by a “technocratic elite” pursuing a “neoliberal” agenda of “globalization” and a meritocratic faith that markets are always right.193 Another writer counterposes adherents of “rights without democracy” against adherents of “democracy without rights.”194 A Harvard Business School team posits that our problems are due to gridlock caused by a “duopoly” of the two major parties.195 These theories overlook the intense struggle for power between Right and Left that has characterized American politics in recent decades. They ignore the high stakes over the redistribution of rents that motivate this struggle, as well as the concerted efforts by a coalition of corporate, political, and ideological cause groups to acquire and hold power in all three branches of government, in the media, in cultural and educational institutions, and at state and local levels of power. Political forces, not just the processes of globalization and technological change, contribute to the steady accumulation of wealth at the top and the stagnation of incomes at the bottom and in the middle. Deregulation and market reform certainly had support from both moderate Democrats and most Republicans, but the intense pressure to favor business over public and labor interests was strictly ideological. Likewise the mirror-​imaging critiques forget the Republican success in legislative floor fights over measures such as the minimum wage, the North American Free Trade Agreement, and welfare reform in the 1990s in blocking any attempt to mitigate their impact on displaced workers and the poor. For Newt Gingrich, for example, NAFTA was a welcome means to drive down American wages. Gingrich argued against raising the minimum wage when NAFTA was passed on the grounds of the need to keep American wages competitive with Mexican wages.196 The two parties are very different in their strategic use of ideology.197 The Republican Party became ideologically coherent, focused, and extreme, whereas the Democratic Party was united less around ideology than by a broadly shared interest in preserving government’s capacity to compensate for market inequality. Reagan’s adherence to laissez-​faire ideology was selective, as he allowed the spurious theory behind the Laffer curve to justify substantial tax cuts at the same time that he raised federal spending on defense and other favored Republican causes that generated rents for Republican-​supporting industries. As George W. Bush’s vice president said, “Reagan proved deficits don’t matter.”198 Republicans consistently criticized Democrats for deficit spending when a Democrat was president, then relaxed their concern when a Republican was president.199 As populist passions around cultural identity surged among Republicans, ideological consistency around the laissez-​faire orthodoxy declined further until it was reduced in Trump’s presidency to a simplistic formula: lower taxes are good, government is bad. Loyalty to Trump—​including the claim that he actually won the 2020 race—​then served Republican officeholders as a marker of loyalty to

 

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a partisan identity rather than an intellectual doctrine. Deviation from loyalty to Trump signaled to voters and donors alike a betrayal of the cause. Ideology then serves function as a marker of group loyalty. Under such conditions, the ideology is less important as the expression of a logically consistent system of ideas than as a sign of fealty and identity. Dissent signals to those policing the boundaries of the group that the dissenter’s loyalties are suspect.200 Moreover, the objective of freeing market relations from excessive administrative controls had a solid footing in economic theory and practice. The alliance of wealth and power is not “technocracy,” nor is it an inevitable consequence of the rise of digital technologies or globalized trade. It is clearly the case that by the late 1970s, the US economy had succumbed to the pernicious combination of low growth and high inflation, and a stimulus of market competition was widely seen as a spur to renewed economic growth. But this was also the case in those European economies that harnessed globalization in ways that benefited wide segments of their societies through a collective investment in technological and skill upgrading. Instead, the United States chose a different path, pursuing a package of policies that let most of the gains from growth flow to the highest income strata. This pathway has undermined competition in both the political and economic arenas and is subverting both democracy and capitalism.

 

6

Financialization, Rents, and Inequality

6.1.  Finance and Rents On June 8, 2021, ProPublica announced that it had obtained more than 15 years worth of IRS tax records on thousands of the wealthiest Americans.1 The records revealed that many had deployed a variety of means to avoid paying income taxes; in several cases, these methods enabled them to report business losses and pay no federal income tax. The report explained how this is possible. Many go to considerable lengths to avoid receiving income in taxable forms. Some pay themselves nominal salaries (e.g., Larry Ellison of Oracle receives a salary of $1 per year and zero in bonuses).2 Another practice is to borrow a substantial sums from a bank, using large blocks of the shares in the company as collateral. The loans are not taxed as income, but the interest payments are deductible from income. In some cases, this method allows billionaires to report tax losses. In 2020, Elon Musk, founder of Tesla, pledged 92 million shares of his company to secure a personal loan; in 2018 he paid no federal income tax. Altogether, ProPublica estimates that the 25 wealthiest individuals were worth $1.1 trillion as of the end of 2018 and paid a total of $1.9 billion in taxes, for an effective rate of 0.17%. For the median household, the federal tax rate is 14%. As the value of the shares of companies such as Amazon, Facebook, and other high-​technology companies soared in recent years, the value of the owners’ wealth rose enormously, but their tax bill did not. For the 25 wealthiest individuals, wealth rose by $401 billion from 2014 to 2018, but the total federal income tax paid was $13.6 billion (a rate of 3.4%). The extreme discrepancy between wealth accumulated and taxes paid has several explanations. One certainly is the scale effects of the network externalities of the big digital platforms, which has enabled enormous runups in the rise of incomes and wealth at the very top.3 However, 16 of the top 25 American billionaires hold wealth in other sectors besides technology, including finance The Returns to Power. Thomas F. Remington, Oxford University Press. © Oxford University Press 2023. DOI: 10.1093/​oso/​9780197685952.003.0006

 

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and investment, retail commerce, and fossil fuels.4 Therefore more important than rents from technological innovation are the rents available from the manipulation of the tax code. Because the federal tax system taxes income from capital at a lower rate than income from labor, ostensibly in order to encourage productive investment, many wealth holders invest in nonproductive but profitable assets that are either shielded from risk by federal regulatory policy or enable the shifting of costs and risks to the most vulnerable segments of society. The tax system rewards the use of financial services such as loans and other techniques (stock buybacks, the carried interest loophole) to allow the wealthiest to accumulate wealth in ways that often reflect pure rent-​seeking. The financial sector has expanded its share of the American economy rather steadily in recent decades, despite occasional interruptions by recessions such as the Great Recession of 2008–​9. It has become so deeply intertwined with every other sector that it has acquired immense market and political power. The rents it collects have raised the incomes of executives and shareholders but have depressed productive investment and wages in other sectors, to the point of extracting profits by reducing the productive capacity of the economy. Its outsize role in the US economy is a major reason that profitability has diverged so markedly from productivity. The financial industry is to the American economy roughly what the natural resource sector is to Russia: a massive source of rents and inequality that blocks opportunities for broadly distributed economic growth, while providing a large stream of material resources to those running the government. Both generate immense profits for their owners and managers but contribute little to broadly shared growth. They succeed by manipulating the rules of the market but not expanding productive knowledge across society. As a result, both contribute to GDP and mean incomes, but widen inequality. Certainly financial markets are essential to economic development. They coordinate the demand for and supply of financial resources. In societies with poorly developed financial institutions, insufficient credit chokes off much productive economic activity that could otherwise benefit both individuals and the larger society. An underdeveloped financial sector thus holds back economic progress and opportunity. Markets for finance are powerful instruments for harmonizing private and public interests. Much research demonstrates that increasing access to credit and deepening credit markets stimulate economic development, raise incomes, and reduce the gap between poor and rich.5 However, like other markets, financial markets can be inefficient.6 Market inefficiencies can occur for many reasons, for example from information asymmetries between sellers and buyers, high transaction costs, or monopoly or monopsony control of resources. When inefficiency results from blocking competition, sellers of goods and services can extract rents—​benefiting themselves at the expense of public. In the worst case, rents reduce overall well-​being,

 



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as Chapter 3 showed. Not only do they reallocate the surplus from trade from consumer to seller, but they also waste productive resources. Although as a society we intentionally create some rents in order to serve a larger public interest, as with grants of intellectual property rights protection, we consider monopoly rents illegitimate. Where rents are extracted, profitability diverges from productivity. Just as the underdevelopment or inefficiency of a financial system can hold back development and opportunity, overdevelopment is a net drag on both. Recent research provides convincing evidence that beyond a given level of financial deepening, the financial sector tends to become a net drag on an economy.7 This is because the high cost of financial services outweighs the social utility of finance. The United States has gone well beyond that point. More and more financial activity serves to feed the incomes of the owners and executive in the financial industry rather than to supply financing to productive activity. Under those circumstances, not only does the financial sector contribute to the substantial increase in income concentration at the top of the distribution, but it also becomes a drag on growth in the economy. The level of rent extraction in the United States has been rising over the last four decades, although estimates of its scale vary widely.8 A large part of the rents come from the financial services industry, which has not only benefited from an ever-​looser regulatory framework for selling financial services, but has also benefited by claiming a growing share of rents generated in other sectors. The financial industry converts profits realized elsewhere in the economy into returns for itself, and also generates rents of its own through a variety of means—​ transactions fees, sales and servicing of securitized loans, usurious interest rates, agency guarantee fees, “yield service premiums,” and the like. Finally, by acquiring ownership of many companies in other sectors, such as healthcare and information media (discussed in Chapters 4 and 5), financial companies such as private-​ equity and hedge funds are able to raise profits by stripping those companies of their productive assets, including employees. Asset-​stripping produces a short-​term return on assets but lowers the long-​term value of assets.9 As the late Harvard Business School professor Clay Christensen put it, we are using capital in ways that block innovators from investing in job-​creating inventions. Rather, companies are improving their bottom lines by shedding workers and cutting other costs. According to Christensen, this is because of the policy of credit institutions, which prefer to see job-​killing innovation rather than job-​creating innovation.10 The financial institutions use benchmarks such as return on net assets, return on invested capital, and internal rate of return to evaluate the creditworthiness of their financial commitments. These measure the efficiency with which capital is used, so that if companies reduce the cost-​denominator by shedding assets and workers, the apparent ratio of return to assets rises. Therefore,

 

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although managers can develop strategies for growth, as Christensen put it, “The reality is that finance will eat strategy for breakfast any day.”11 From the early 1980s through the 2000s, the financial industry grew at a faster rate than the rest of the economy. Deregulation, including the erosion of the former separation between investment and commercial banking, allowed managers to take greater risks with shareholders’ money. They pocketed the proceeds but faced very little downside risk from making bad investment decisions. The financial industry’s profits rose rapidly as a share of GDP as it pursued short-​ term gains. As the National Commission on the Causes of the Financial and Economic Crisis in the United States, formed to explain the great financial crisis of 2007–​8, put it after the fact, “Compensation systems—​designed in an environment of cheap money, intense competition and light regulation—​too often rewarded the quick deal, the short-​term gain—​without proper consideration of long-​term consequences.”12 The financial sector (or, more broadly, FIRE, that is, finance, insurance, and real estate) has seen by far the greatest rise in value-​added as a share of GDP of any industry. We should treat the term “value-​added” skeptically. It is defined in accounting as the value added to a product or service at a particular stage of production, beyond its original cost.13 How value is measured is of course also a matter of accounting conventions. Currently, national accounts methods around the world assume that the efforts of financial intermediaries such as banks and other credit-​issuing organizations to transfer money from lenders to borrowers function to facilitate productive activity in other parts of the economy, in turn generating fees, commissions, and an interest rate margin that flow to the intermediaries. These forms of income are counted as value added to the country’s total income.14 Figure 6.1 shows that the contribution of the financial industry in the United States has risen steadily as a share of GDP. The figure also shows finance and insurance separately from real estate, although both have risen as shares of GDP. The share contributed by manufacturing has fallen sharply. Meantime, the information sector (publishing, media, telecommunications, data services) has hardly increased its share at all. Deregulation of the financial industry in the United States is by no means the inevitable result of technological change or changes in the global division of labor, or the shift to a “knowledge economy.” Indeed, discussions of the concept of the “knowledge economy” that do not account for the growth of the financial industry confuse value-​subtracting parts of the economy with technological improvements that raise productivity.15 Knowledge-​intensity of the economy should not be equated with the shift from blue-​collar jobs in manufacturing, mining, construction, and other industries to jobs in services. The latter include a large number of low-​skill jobs, such as personal care services and manual labor. For example, comparing the structure of the nonfarm workforces in

 



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Value-added as share of GDP, 1947–2017 FIRE has risen rapidly as a share of GDP manufacturing has fallen and information industry share has hardly grown

30

Manufacturing Finance, insurance, real estate, rental and leasing

Percent GDP

20

10 Information

0 1940

1960

1980

2000

2020

Source: BEA Manufacturing includes production of all durable and non-durable goods information comprises publishing, media, internet, data processing

Figure 6.1:  Value-​Added as Share of GDP, 1947–​2017

January 1939 and December 2015, the share of employment in private education and healthcare has risen rapidly, mainly due to an increase in the healthcare sector. Much of this employment is in relatively low-​skill, low-​wage jobs, often performed by women, minorities, and immigrants. Likewise, employment in the retail sector has increased its share, as has employment in leisure and hospitality. Meantime, the broad category of “professional and business services” has greatly expanded its share of employment at a far greater rate than has employment in the financial services industry. And employment in the “information” industry, which includes publishing and media, has fallen substantially as a share of the total (see Figure 6.2). Therefore we should avoid confusing the expansion of the service sector or the growth of the financial industry in either employment or value-​added with the notion of the “knowledge economy.” Indeed, a knowledge-​intensive economy need not mean that the financial industry grows by extracting rents from the rest of the economy. Strong further evidence of this point can be seen by comparing the United States with Germany. Germany has seen a steady decline in the share of FIRE in value-​added and essentially no change in the manufacturing share of value-​ added since 2005, although the technological sophistication and global competitiveness of Germany industry have risen steadily (Figure 6.3).

 

US: changing structure of employment by industry sector, 1939 and 2015 Information Other services Construction Financial activities Manufacturing Leisure & hospitality Retail trade Professional & business services Private education and health 0

10 20 Share of total nonfarm employment 1939

30

2015

Source: Lyda Ghanbari and Michael D. McCall, Current Employment Statistics Survey: 100 Years of Employment, Hours, and Earnings. Monthly Labor Review, U.S. Bureau of Labor Statistics, August 2016

Figure 6.2:  Changing Structure of US Employment, 1939 and 2015 Source: US Bureau of Labor Statistics.

US and Germany: Manufacturing and FIRE, value-added as share of GDP, 2005–2018

25

Sector share of GDP

Germany-manufacturing

US-FIRE

20

Germany-FIRE 15 US-manufacturing

0 2005

2010

2015

2020

Year Source: OECD (2020), Value added by activity (indicator). doi: 10.1787/a8b2bd2b-en (Accessed on 20 November 2020)

Figure 6.3:  Finance, Insurance, and Real Estate (FIRE) and Manufacturing as Share of Value-​Added in Economy, United States and Germany, 2005–​18

 



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To repeat the point, the German example indicates that the forces of technological and change do not necessarily produce financialization. Policy choices made over taxation and regulation shape the degree to which the financial industry serves the rest of the economy or extracts rents from it.

6.2.  Financialization We can define financialization as the shift of more and more profit-​making activity in the economy from other sectors to finance. One reason for its rising profitability—​notwithstanding the financial crisis of 2007–​8—​is the growth of concentration, which has raised profitability and market power. As I pointed out in Chapters 3 and 4, deregulation in banking sparked an initial burst of competition. Soon afterward, however, a reverse wave began, and banking, like other industries, began to grow more concentrated again. Facing declining profit margins due to higher competition, many firms in deregulated industries filed for bankruptcy or were bought out through mergers and acquisitions.16 As deregulation allowed large banks to acquire other banks and to enter markets across states, the number of banking institutions began to fall. It has continued to fall steadily since then, from over 14,000 in 1986 to fewer than 4,700 today.17 Figure 6.4 depicts the trends. As the total number of banks shrank, the share of bank assets held by the five largest banks soared. One goal of banking deregulation was to lift many of federal rules restricting the ability of thrift institutions to make high-​risk but high-​profit loans. In 1982 Reagan signed into law the Garn-​St. Germain Depository Institutions Act, which lifted nearly all regulatory controls on savings-​and-​loan banks, allowing them to compete with commercial banks. This led many of them to engage in risky lending with deposits that were guaranteed by federal deposit insurance. Ultimately, more than 700 savings and loans failed. The cost of the bailout reached almost $500 billion, of which $130 billion came from the federal budget and the rest from asset-​holders. In effect, therefore, the winners collected the benefits of deregulation, while the costs were shifted to the general public.18 The same pattern was repeated after the financial crisis of 2008–​9, when the federal government restored liquidity to “systemically important” financial institutions (those whose failure threatened to bring down the entire financial system) rather than letting them fail. American International Group (AIG) is a notorious case in point. Following the financial crisis of 2008, AIG obtained a $182 bailout from the US government. This it used to pay its top managers $165 million in “retention bonuses” despite their massive failure to foresee the consequences of selling credit default swaps as legitimate insurance against the risk of the default of subprime mortgage-​backed collateralized debt obligations.

 

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The Returns to Power US: Total number of FDIC-insured commercial banks, 1934–2021 Banking concentration, 1996–2017 50

5-bank share of total assets

Total number of banks

12000

45

10000

40

8000 35 6000 30

Share of total banking assets owned by 5 largest banks, %

Total number of commercial banks

14000

4000 1940

1960

1980

2000

2020

5-bank asset concentration refers to assets of five largest banks as a share of total commercial banking assets. Total assets include total earning assets, cash and due from banks, foreclosed real estate, fixed assets, goodwill, other intangibles, current tax assets, deferred tax, discontinued operations and other assets. Source: US FDIC [https:banks.data.fdc.gov/explore/historical? displayFields=STNAME%2CNew_Char%2CBRANCHIN%2CTOTAL&selected EndDate=2018&selectedReport=CBS&selectedStartDate=1934&selectedStates=D&sortField=YEAR&sortOrder=desc] Concentration index from St. Louis FRED [https://fred.stlouisted.org/series/DDO106USA156NWDB]

Figure 6.4:  US Total Number of Commercial Banks, 1934–​2021 and Banking Concentration, 1996–​2017

From the beginning of the 1980s, in fact, nearly all the federal agencies charged with regulating the financial industry systematically loosened restrictions on banking. They eased capital requirements for lending, refrained from enforcing consumer protection laws, let banks enter the securities trading field, and blocked states from countering with new regulations.19 One agency, however, the Commodity Futures Trading Commission, headed by Brooksley Born, objected, worrying that the relaxation of restrictions on derivatives trading, however profitable they were for banks, were excessively risky. She proposed to publish a concept paper outlining her reservations. However, the head of the Federal Reserve, Alan Greenspan, Treasury secretary Robert Rubin, and deputy Treasury secretary Larry Summers strenuously objected. According to one official in her commission, she received a telephone call from Summers in early 1998, who told her: “I have 13 bankers in my office and they say if you go forward with this you will cause the worst financial crisis since World War II.”20 Ultimately Summers prevailed. Relaxation of banking regulation continued. The story illustrates the power of the financial industry to defeat efforts at regulation. Debt in the economy mounted, backed by increasingly unsound financial derivatives, resulting in the collapse of the financial system beginning in late 2008 and bringing about the Great Recession. Although the

 



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consequences of lax regulation were dire from the standpoint of society, they generated very high returns to banking industry shareholders and executives, most of whom were shielded from any personal consequence of the financial collapse thanks to the federal bailout of the industry. The deepening of the mutually beneficial alliance of wealth and power is illustrated by the case of Ameriquest, which became one of the leading sources of subprime mortgage lending in the country. In August 2006, President George W. Bush appointed its billionaire founder, Ronald Arnall, as ambassador to the Netherlands, even though by then nearly every state attorney general had opened investigations into the firm’s deceptive mortgage lending practices. Arnall was one of the Republican Party’s largest donors and a major funder of Bush’s inaugural celebrations. Arnall and his companies (Ameriquest and its subsidiary, Argent Mortgage) prospered from federal policies that encouraged abuses in the mortgage market, particularly those associated with subprime loans. Arnall was the inventor of the “stated income loan,” a financial innovation that allowed Ameriquest to approve loans to borrowers without requiring documentation of the borrower’s stated income. He also reduced the requirements for equity or down payments on mortgage loans.21 Subprime mortgage loans were extremely profitable for the financial institutions that underwrote, brokered, serviced, and sold them because they generated high fees, frequently came with low initial rates that quickly ballooned, and could be repackaged as securities for high-​return investors. They were also often disastrous for the borrowers, who were often offered subprime loans on the basis of incomplete and deceptive sales pitches.22 The Bush administration’s refusal to curb the rapid growth of the subprime mortgage market in reflected both a broad doctrinal preference for expanding homeownership and minimizing government regulation on the part of the federal government—​one shared by both Republican and Democratic administrations—​as well as its close ties to financial industry tycoons such as Arnall. Dogmatically convinced that any problems in the home mortgage market would correct themselves so long as government refrained from intervening, Bush and his senior staff ignored multiple warnings from some advisers that a crisis was approaching.23 The Ameriquest case is one of many in which elected Republicans and conservative backers blocked the inclusion of regulatory guardrails into legislation that had ostensibly progressive aims, such as widening access to housing and higher education by offering federal backstops to private market lending, and they systematically undermined the use of the few guardrails that existed in the administration of the programs. For example, Congress provided that student higher education lending may not be regulated by the FTC, the Consumer Financial Protection Bureau, or the states. Lenders are likewise exempt from any “truth in lending” obligations, so that a student borrowing money for higher

 

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education has no way in practice to know what the actual borrowing costs will be.24 In a similar way, the 1994 Home Ownership and Equity Protection Act, signed by Bill Clinton, gave the Federal Reserve regulatory authority over mortgage lending. Alan Greenspan, however, ideologically committed to an extreme laissez-​faire market ideology, refused to use it to check the growing use of bundled and securitized subprime mortgages in the 2000s.25 The financial crisis of 2008 and the ensuring Great Recession demonstrate the disastrous effects of the alliance of the financial industry with politicians claiming to pursue a laissez-​ faire ideology. The permissive regulatory environment in finance since the early 1980s certainly brought rising market power and profitability, notwithstanding significant a downturn between 2003 and 2008.26 Both market power and profitability have risen in the banking industry. Return on assets, that is, net after-​tax income as a ratio of average total assets, rose from 0.73 at the beginning of 1984 to 1.3 in summer 2019, the level it had attained by the mid-​1990s. Market power, as measured by the Lerner Index,27 rose from about 20% to about 33% between 1996 and 2014 (earlier and later data are not available) (see Figure 6.5). As the financial industry has increased its market power, its share of total corporate profits has grown commensurately (Figure 6.6). Market power in the US banking industry: Lerner Index of market power, 1996–2014 .35

Percent

.3

.25

.2 1995 2000 2005 2010 Source: Lerner index from FRED, Federal Reserve Bank of St. Louis [https://fred.stlouisfed.org/series/DDO104USA066NWDB] Lerner index measures ratio of output price to marginal cost of inputs, ie markup

Figure 6.5:  Market Power in the US Banking Industry

2015

 



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Financial industry and manufacturing shares of total corporate profits, 1987–2020 .5

% of corporate profits

.4 Financial .3

.2

Manufacturing

.1 1980

1990

2000

2010

2020

Source: BEA. various years NB: Financial sector includes banking, insurance, holding companies, credit intermediation, securities, funds, trusts, and other financial vehicles

Figure 6.6:  Financial and Manufacturing Sector Shares of Total Corporate Profits, 1987–​2020

Although the industry’s share of total profits has not yet recaptured the heights it reached before the Great Recession, when it exceeded 40% of GDP, it is now rising again. Meantime, the profit share of manufacturing has fallen again to below 20%. These figures provide further evidence in favor of the view that the value being created in the economy is increasingly shifting away from the production of goods and into profitable but nonproductive financial transactions. Many economists believe this trends reflects a siphoning of effort away from productive investment and job creation and into activities that return a high profit to the financial industry.28 As profits accrue to the owners of financial assets—​stocks, bonds, derivatives, and other financial instruments—​ and to the executives of firms in the financial industry, their incomes and wealth rise. Meantime, the cost and risk associated with financial transactions are often transferred to the public at large and those least able to afford participating in financial markets (as illustrated in the consequences of the crash of the housing market in 2008–​9, and the cost of bailing out financial institutions that were “too large to fail”). Since the distribution of ownership of financial assets is extremely unequal, financialization therefore contributes to wealth and income inequality both through the imposition of higher costs and risks to taxpayers and consumers, and through higher profits to owners and executives.

 

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The financial industry has innovated with new and complex products, including by repackaging high-​risk loans as securities. This allows financial institutions to sell not only the securities, but also insurance on those securities. The market for subprime mortgage loan securities was a particularly egregious example, since the financial bubble they produced resulted in a massive financial crisis that led to a protracted economic recession. The financial industry has also created a similar market for securitized student loans (student loan asset-​backed securities, or SLABS). The market for SLABS grew rapidly from the mid-​1990s. Over the period when the residential mortgage-​backed securities market was thriving, so was the SLABS market. The financial industry won adoption of rules making it nearly impossible to restructure loans or discharge debt through bankruptcy. Companies then repackaged the loans as securities. The total value of SLABS rose at an average annual compounded rate of nearly 22% from 2003 to 2007 (well faster than the market for residential mortgage-​backed securities) and the market for insurance on it at a rate of nearly 10%.29 By summer 2022, some 45 million people owed lenders for education loans totaling $1.6 trillion.30 The financial industry benefited from the transactions and service fees from servicing the mortgage and student loan markets, regardless of the underlying risk involved. When the subprime mortgage securities market collapsed, most of the cost was borne by taxpayers and homeowners, rather than the financial industry. The IMF distinguishes three dimensions of financial development: the depth of financial markets, that is, the share of private credit markets in GDP; the degree to which access to finance is widely shared among the population; and the efficiency of financial institutions in converting money into productive activity. For the United States, financial depth now greatly exceeds other developed economies, whether measured as the share of bank credit to the private sector, the level of market capitalization of publicly traded companies, or total domestic credit provided by the financial sector (all measured as a share of GDP). According to the IMF, in emerging markets, the average ratio of private credit markets to GDP is about 50%; in advanced economies it is greater than 130%, while total stock market capitalization is about 40% in emerging economies and about 70% in advanced economies.31 The United States has exceeded both measures by a considerable margin. We can see how much financialization has grown by looking at Figure 6.7. It tracks two measures; the first is the total amount of credit provided by the financial industry as a percentage of GDP. The figure shows that this share has risen steadily. The second is the assessed market value of the publicly listed firms in the financial industry, which, again as a share of GDP, rose sharply in the 1980s and 1990s. As the figure shows, total bank credit to the private sector in the United States is approaching 250% of GDP. Market capitalization is greater than 150% of GDP.

 



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United States: Measures of financialization, 1971–2019 Domestic bank credit to private sector, % of GDP Market capitalization of listed domestic companies, % of GDP, Domestic credit provided by financial sector, % of GDP, (right axis) 60

250

Bank credit share of GDP

Bank credit % left axis

Financial sector credit % right axis

55

200

Market capitalization % right axis 150

50 100

50

45 1970

1980

1990

2000

2010

2020

Source: World Bank Development Indicators, Databank

Figure 6.7:  Measures of Financialization in the US, 1971–​2019

The IMF has found that the relationship between the development of the financial system and the growth rate of the economy follows an inverse U-​shaped curve: up to a point, increasing access to finance, efficiency of transactions, and expanding credit raises growth and decreases inequality. However, beyond a certain point, which can vary among countries, the curve turns downward, and growth rates decline.32 The United States passed that point in the 1980s. An extremely large proportion of Americans use credit: 80% of Americans have a credit score; 40% of adults under the age of 30 are paying off student loans; 107 million have car loans; 178 million have credit cards.33 About two-​thirds of households own their own homes, and of them, about 63% hold mortgages.34 However, Americans pay dearly for these services despite the fact that much of the risk associated with consumer lending is borne by the federal government. As long ago as 1984, the economist James Tobin worried that the financial system was increasingly inefficient with respect to the function of pooling capital and allocating it to productive investment. Financial activity undertaken for short-​term gains was becoming an increasing burden on society as a whole.35 When Tobin wrote his essay, finance and insurance were the equivalent of 5.4% of GDP, and FIRE altogether represented 17.2%. Their share of total measured output in the economy has risen since then. As of 2019, finance and insurance comprised 7.8% of GDP and the FIRE sector as a whole 21.2%.36

 

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The US economy has reached the point where the real economy serves the financial industry, not the other way around.37 The flow of funds has become reversed in the past 40 years, from a condition in which more funds flowed into productive activity from financial markets than back from firms to financial markets, to one in which the net flow is mainly in the opposite direction. As Owen Cass has shown, this is not a matter of the rise of firms with fewer tangible than intangible assets as a share of the total; it is a trend visible in all sectors. Cisco systems is an example. In the past 15 years, the company spent $101 billion on stock buybacks, and just $15 billion on capital expenditures. The total flow of funds in and out of firms as a share of GDP has quadrupled in recent decades, but the share of net flows out of firms and into the financial industry has increased much more as a share of GDP than has the flow of funds from the financial industry into firms.38 Political rather than economic changes account for financialization.

6.3.  Privatizing Profits, Socializing Risk The financial industry profits from existing inequalities that deepen inequality in the provision of public goods. As political power has shifted increasingly to favor wealthy interests, their influence in Congress and the regulatory agencies has skewed the use of financial instruments to provide public goods. Both the drafting of the laws and their implementation in regulations reflect the tilt in power. Conservatives prefer to shift the provision of public goods to the private sector, using a variety of mechanisms as incentives. A favored device is federal guarantees or subsidies of private lending to achieve a nominally public purpose, such as increasing homeownership, access to higher education, and construction and maintenance of public infrastructure. These mechanisms have several benefit for the financial industry and their political allies. First, they appear to have the merit of using the market rather than government taxing and spending to expand opportunity. They are designed in such a way as to be as self-​financing as possible, and do not appear as line items in federal spending. Of course, none of them is entirely self-​financing. Since they transfer profits to the lenders while shifting risk to the taxpayers, at moments of massive financial crisis they wind up costing the public enormous sums. Second, they generate handsome profits for the financial industry, including banks and other lenders and the private firms that service the loans. These profits are exchanged for favorable laws, regulations, and enforcement decisions from the politicians drafting the laws. Spreading the lobbying and campaign spending across Republicans and Democrats helps sustain majority support in Congress for the lax regulatory treatment of these

 



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instruments even when party control of Congress and the White House changes hands.39 Even some of the government’s own creations, such as Fannie Mae and Freddie Mac, lobby for favorable regulatory treatment. For example, Fannie hired former Republican House Speaker Newt Gingrich to lobby for its interests.40 Fannie and Freddie are “government-​sponsored enterprises,” or GSEs, set up to expand access to mortgage loans and are by far the largest of the GSEs in the housing market.41 Fannie and Freddie operate in the secondary market for mortgages, making it easier for lenders to originate mortgage loans by buying these loans and selling them on. As GSEs, Fannie and Freddie must act as if they were commercial firms, offering competitive rates to buyers of their mortgage loans. They are also publicly listed and expected to offer competitive returns on equity. But as instruments of the public goal of expanding access to affordable housing, they have also been required to buy mortgages taken out by borrowers who may not qualify for purely commercial loans. They were allowed to operate with lower capital margin requirements than commercial lenders, with the implicit guarantee of federal backing in case of a liquidity crisis, enabling them to attract capital. For these reasons, although they expanded access to housing, they also offered investors extremely high returns on equity—​nearly twice those of commercial banks.42 Federal educational financing policy reflects a similar pattern of shifting the burden of risk and cost from private financial institutions to the taxpayer while ensuring a substantial flow of profits to private investors. The government has created a government-​owned corporation, the Student Loan Marketing Association, or Sallie Mae, as a financial vehicle to serve a public policy purpose. It, too, behaved as if it were a private entity, becoming was one of the heaviest spenders among financial firms.43 While the ostensible public policy objective of federal guarantees of student loans is to widen access to higher education, the effect for many borrowers has been years of onerous debt service payments (which by law may not be restructured through bankruptcy). The financial service firms that manage these loans have every incentive to steer borrowers from the category of program that would enable them to use a more favorable repayment plan that allows the borrower to repay a fixed percentage of income rather than a fixed amount.44 As with other policies since the late 1970s, the Democrats have agreed to the use of these apparently market-​based solutions to public policy problems. Some did so in the 1970s, 1980s, and 1990s in the belief that the market could be used to expand opportunity by encouraging growth; others did so reluctantly, realizing that there was substantial public opposition to increasing federal taxes and spending. Over and over, however, these seemingly market-​based

 

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policies—​whether liberalizing international trade and investment, or providing access to homeownership and higher education by guaranteeing private loans—​ were crafted in such a way as to ensure that the benefits would flow disproportionately upward and the costs disproportionately downward. As Suzanne Mettler points out, these programs do expand the federal government but conceal the expansion from the public. They “exacerbate inequality: they shower their most generous benefits on affluent people, and they generate detrimental side effects that adverse impact those who are less well-​off.”45 The GSEs are examples of financial instruments ostensibly designed to align the profit incentives of private investors with public objectives. The financing of public infrastructure is another example. As direct public spending on schools, parks, sanitation, and other basic public goods declines, inequality in the tax resources across different municipalities, counties, and states widens inequality in access to education, recreation, healthcare, and other public services. Consequently, many school districts facing rising costs—​for example, for maintenance of aging facilities—​turn to debt financing. They issue their own bonds or use municipal bonding authority. The bonds are tax exempt, making them attractive to the financial industry. They also carry high interest rates, higher as the creditworthiness of poorer school districts is lower. The financial industry has first claims on repayment. Moreover, when school districts accepted newer, more exotic financing instruments such as variable rate bonds, the cost of debt service soared when interest rates spike up. Taxpayers wind up paying for the debt, resulting in a net redistribution of income from poor to rich. As Dustin Jenkins has powerfully shown, the way urban infrastructure has been built also has reinforced racial segregation, so that the Black residents of poorer cities end up saddled with tax obligations but not improved housing, parks, or schools.46 Likewise, financially advantaged debt finance is widely used in housing and other real estate development under federal housing policy. Developers and landlords have leverage over governments and tenants while enjoying tax privileges granted by federal housing policies intended to benefit equitable access to public housing. These roles played by the financial industry well illustrate the close connection between the shrinkage of public commitment to the provision of public goods and the financialization of the economy. This is another way in which financialization has steadily reinforced inequality by income, race, and geography.47 Chapter 8 describes a related pattern in China, whereby local governments employ a variety of financial instruments to encourage private capital to invest in projects intended to stimulate growth and development. These financial instruments are attractive to investors, at least so long as the market value of the securitized assets remains stable.48

 



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“Qualified opportunity zones” are another case. This refers to a provision built into the 2017 Trump tax bill.49 The ostensible purpose was to encourage development in distressed neighborhoods by relaxing administrative obstacles to investment and creating tax exemptions for investors. Nearly 8,500 such zones have now been created. The law offers the investor tax incentives in the form of lower and deferred capital gains taxes. Moreover, the regulations governing the zones are highly permissive. The Senate blocked a reporting requirement in the bill, so that little is known about their actual impact. However, investors have found them extremely lucrative. A congressional analysis of 2019 tax data, however, found that most opportunity zone investment goes to high-​ end properties such as luxury hotels and condominium complexes. Half of the investment funds have flowed to the highest-​income 1% of zones. Whatever new development of low-​income neighborhoods has occurred, therefore, has been enormously outweighed by the development of high-​end real estate assets with tax-​deferred capital gains benefiting the rich.50 As a result, they have become extremely attractive to wealthy investors. Government policies since the late 1970s reduced prudential regulation of Fannie and Freddie through such measures as the Community Reinvestment Act of 1977 under Jimmy Carter, the 1992 creation of an oversight body for Fannie and Freddie under George H. W. Bush, and the 1995 “national homeownership strategy” under Bill Clinton. In 2000, Clinton signed the Commodities Futures Modernization Act, which exempted over-​the-​counter trading in derivatives from regulation. Pressed to increase profitability despite managing a growing portfolio of low-​quality mortgage loans, such as subprime mortgages, Fannie and Freddie invested heavily in highly speculative derivatives, including the high-​risk subprime mortgages they were guaranteeing. By December 2007, the portfolio of housing loans they owned or guaranteed held a large number of high-​risk, low-​quality loans, and their capital assets included a high share of high-​risk derivatives. In 2007, as more and more borrowers defaulted on their loans, Fannie and Freddie began losing hundreds of billions of dollars. However, at that point, they owned or backed over $5 trillion dollars worth of mortgage loans. Therefore, like other major financial institutions, they were too big to be allowed to fail. In 2008, the government placed them into a conservatorship, a form of legal guardianship, where they remain today. Moreover, their role in the housing market has increased further. At present, they own or guarantee nearly half of single-​family mortgage loans and continue to provide a good return to investors.51 The role of Fannie and Freddie in the financial crisis and subsequent Great Recession reveals a lot about the consequences of using public guarantees of financial vehicles to achieve public policy goals, in this case expanding access

 

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to homeownership. Legislation and regulation are shaped by a political process in which the relative power of the financial industry determines the distribution of benefits and costs. Congress blocked efforts to increase restrictions on the lending activity of the GSEs, encouraging them to increase lending to unqualified borrowers but also making them more attractive financial investments. More and more of the benefits of this mixed public-​private model of public goods provision were appropriated by investors, while more and more of the risks and costs were shifted to the public. As in the expansion of global trade in the same era, where Republicans and Democrats agreed on the benefits of opening trade but Republicans blocked efforts to offset their costs to particular groups (e.g., stripping nearly all labor rights enforcement and trade adjustment funds out of trade bills), so too the reliance on increasingly complex financial instruments to widen homeownership ended up costing some 10 million people their homes when the housing bubble burst and the Great Recession began. In multiple ways, therefore, financialization has replaced the provision of public goods with private investment under terms deliberately skewed to distribute a disproportionate share of the benefits to those who are well-​off and politically connected. GSEs such as Fannie and Freddie illustrate the problem of unregulated liberalization. By granting GSEs certain monopoly privileges—​loose capital reserve requirements, implicit guarantees of a bailout—​the government lets them reap rents in the financial markets. But, whereas a monopoly such as a utility company must operate in a heavily regulated environment, the GSEs were allowed to return rents not only to their own top executives but also to their shareholders. Meantime, although they certainly have increased liquidity in the housing market, their freedom to take up high-​yield, high-​risk assets also made it nearly inevitable that when the housing market crashed, its consequences would be disastrous for the most vulnerable. Monopoly rents are ubiquitous when the government writes laws and rules to distribute public goods via financial instruments, particularly when the laws and rules are set by lobbyists with highly specialized knowledge but enforced by regulators with much weaker capacity. Public-​private partnerships that operate as commercial entities create rents when they are given administrative privileges with little oversight. As Chapters 7 and 8 will show, the same point applies to state-​owned enterprises in Russia and China, which also operate as commercial monopolies serving public purposes, whereas in Germany, more effective regulatory oversight prevents top executives from claiming high rents from the financing of public services. In the United States, conservatives supported using GSEs for what were ostensibly publicly beneficial policies but which, in their design and their implementation, favored the private interests of financiers. The GSEs themselves played the game of

 



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politics by heavy lobbying (spending money that was generated by the government guarantees of their own financial activity) for better terms for the lenders and worse terms for the borrowers.52 The alliance of the private financial services industry with politicians underscores the point that the rents generated through influence over policy sustain the exchange of profits and power.

6.4.  Political Influence Industries that seek political protection from competition do so to insure themselves against market risk. In the case of the thrift institutions, deregulation encouraged their owners and managers to place high-​return, high-​risk bets using depositors’ money in the knowledge that the deposits were guaranteed by federal deposit insurance. This transfer of risk from private investors to the public was at variance with the Chicago-​school theory of deregulation and from the avowed position of the Reagan administration. In the midst of the massive S & L crisis, the president’s economic report to Congress in 1986 went so far as to call for further deregulation of banking, dismissing the argument that it was deregulation that had brought about the crisis in the first place. It stipulated, however, that “shareholders and managers of financial institutions should be made to bear—​promptly and effectively—​the good and bad consequences of the operations of the institutions they own and control.”53 But this of course did not happen. Both in the S & L crisis and in the deeper financial crisis two decades later, the federal government absolved owners and managers of any civil, criminal, or economic responsibility for the disastrous mistakes they had made. The very concentration of banking assets that government encouraged through its antipathy to antitrust resulted in a situation where major banks had become “systemically important” and therefore “too big to fail.” Far from assuming any financial or criminal liability for their actions, those who benefited from the massive government subsidies to the failed financial institutions profited handsomely from their failures, while the costs were shifted to the taxpayer. By virtue of possessing implicit government guarantees against failure, “systemically important” banks can offer financial services at lower rates than their competitors, take on higher risk, and realize higher profits than their competitors.54 The big banks have captured rents by becoming “too big to fail.” An ideological identification of the policymakers and regulators with the point of view of the financial industry certainly may be one reason that the regulators loosened the reins on the financial industry. But the industry has backed ideology with extremely heavy spending.55 Its total spending on lobbying has risen 2.5 times in the last 20 years, more than any other, including healthcare. The FIRE

 

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The Returns to Power Total spending on lobbying, by industry, millions, 1998–2021 FIRE Health Care

Pharmaceuticals/Health Products Electronics & Telecomms Electric Utilities Business Associations Oil & Gas Misc Manufacturing & Distrib Civil Servants/Public Officials Education Air Transport Automotive Entertainment Misc Issues Defense Aerospace 0

2,000 3,000 6,000 Total lobbying spending, 1998–2021, mins $

8,000

Source: Center for Responsive Politics [https:www.opensecrets.org/federal-lobbying/ranked-sectors]

Figure 6.8:  Total Expenditures on Lobbying, by Industry, 1998–​2021

sector—​finance, banking, insurance, and real estate—​spends far more than any other industry on lobbying in Washington. (See Figure 6.8.) Remember also that this does not count spending on election campaigns. The financial industry spends lavishly to elect its friends in government. For example, when he was chair of the Senate Banking Committee between 1999 and 2001, Phil Gramm pushed successfully to roll back restrictions on the ability of banks to enter insurance and securities brokerage businesses. As the New York Times reported, “His economic views—​and seat on the Senate banking committee—​quickly won him support from the nation’s major financial institutions. From 1989 to 2002, federal records show, he was the top recipient of campaign contributions from commercial banks and in the top five for donations from Wall Street.”56 Political spending by the industry has grown steadily. In the 2017–​18 federal election cycle, the FIRE industry spent $1.9 billion on lobbying and campaign contributions ($922 million in campaign contributions and $957 million on lobbying). Much of this spending was aimed at undermining provisions of the Dodd-​Frank financial reform law and to seek further exemption from regulation. This campaign was certainly not the only political spending by the financial industry, since many business groups such as the Chamber of Commerce also work on financial issues. This spending paid off handsomely. The top six financial

 



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industry firms alone recorded $111 billion in profits in 2018.57 Relaxation of regulatory standards enacted into law in March 2018 and the lower corporate tax rates in the Trump tax bill of December 2017 were among the reasons for this extraordinary rate of return.58 The financial and real estate industries have pushed heavily to preserve the carried interest tax loophole. This refers to a rule in the tax code that allows managers of hedge funds, venture capital funds, and private-​equity funds to take a percentage—​typically 20%—​of the realized gains on their investment portfolios as compensation, but for it to be taxed at the rate of realized capital gains rather than as personal income. Currently the rate is 20% plus 3.8% of net investment proceeds, rather than the top individual rate on personal income (currently 37%). Managers also normally receive 2% of the value of the assets they manage as annual fees. Despite persistent public indignation that the managers are treating “other people’s money” as their own so that they should not be rewarded in the tax code as if they were risking their own capital, the carried interest tax loophole has survived every attempt to eliminate it. Even Donald Trump, who both as candidate and as president fought it, could not overcome the powerful lobbying efforts of the financial and real estate industries.59 Likewise it survived again in the version of the climate and tax bill that the Democrats have worked to enact, when the last Democratic senator to announce her support for it in summer 2022, Kyrsten Sinema, succeeded in restoring it to the bill. She is the beneficiary of intense lobbying by the private-​equity industry, from whom she has raised half a million dollars in the 2022 election cycle, equivalent to about 10% of her total campaign funds.60 Trump’s 2017 tax bill did make a modest attempt to restrict the use of the loophole by requiring that corporations hold their investments for at least 3 years to be eligible for the loophole. In 2018, after the bill came into force, the Treasury Department attempted to narrow this corporate exemption and issued a notice declaring that only C corporations were to qualify for the accelerated schedule, not S corporations.61 However, the financial industry fought back with a series of legal challenges and intense lobbying efforts.62 In the last days of the Trump administration, the Treasury Department adopted rules allowing private-​equity firms to avoid the three-​year holding period by moving money across investment entities.63 The private-​equity industry has succeeded in defeating any efforts by the IRS to curb its practices of concealing income. The financial industry’s political investments have paid off handsomely. For example, the 2017 Trump tax cuts eased federal regulation on the largest banks. These changes accounted for more than half of the $59.1 billion in net income received by financial companies in the fourth quarter of 2018.64 The financial

 

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industry was again extremely active in 2020. For example, the Wall Street Journal reported on October 25, 2020, that the private-​equity industry spent more on the 2020 election than in any previous year. As of the end of September 2020, private-​ equity and other investment firms—​ not including hedge funds—​ donated $132 million to organizations and candidates to influence the outcome of the election.65 The vast majority of this money went to Republicans. Another example of the financial industry’s political clout is the fight over the Consumer Financial Protection Bureau. It was created by Senator Elizabeth Warren with support from the Obama administration. Warren’s goal was to create a regulatory agency equivalent to the Consumer Products Safety Commission created in 1972 that would force the financial industry to stop predatory lending practices and increase the information available to consumers needing credit for home, auto, and consumer loans.66 The goal was fair competition and an end to abuses by lenders. Following the financial crisis, her bill was incorporated into the Dodd-​Frank legislation. The financial industry fought vigorously against the agency from the start.67 When the Republican Party won a majority in the House in 2010, the industry mounted a concerted and largely successful effort to gut the agency through its allies in Congress, such as the House Committee on Financial Services. Committee chair Jeb Hansarling, championing the interests of the industry, attacked the agency as tyrannical and unconstitutional.68 A challenge to the very constitutional legitimacy of the agency ultimately failed, but the provision that its director could not be removed by the president was struck down.69 Under President Trump, the agency was rendered toothless as its director refused to exercise its powers. One of the most dangerous ways in which the financial industry’s fight against regulation has enabled the financial industry to appropriate profits for itself while shifting costs and risks to others has been through the growth of “shadow banking,” the sector of commercial financial activity that is hardly regulated (including investment banks and money market funds). The activity of the shadow banking sector was a major cause of the financial crisis of 2007–​8, when high-​risk financial vehicles such as derivatives, insufficiently backed by collateral, suddenly plummeted in value from a massive simultaneous sell-​off.70 The growth of the shadow banking sector was driven by the ability of credit institutions to offer loans backed by new types of securities, such as the subprime mortgage loans. These lenders conduct credit operations without any claim on backup credit support from the Federal Reserve. They can issue short-​term loans and hold longer-​term, high-​risk financial assets. The total value of funds controlled by the shadow banking sector grew rapidly from the early 1980s, reaching about 90% of GDP by 2007, while the scale of insured bank deposits fell from about 50% of GDP to about 30% over the same period.71 The complexity of the shadow banking system increases

 



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the vulnerability of the financial system to breakdown. The fear that investors will move their funds to the high-​profit, high-​risk shadow banking industry and out of the regulated sector is one reason banks have resisted stronger regulation. The shadow banking institutions enjoyed the benefit of taxpayer bailouts after the 2008 crisis, but do not face the capital requirements for lending activity that retail banks must observe. As a result, much financial activity exploits the gap in the regulatory environment through regulatory arbitrage.72 The financial sector uses both insider and outsider lobbying tactics. Insider lobbying is concentrated in Washington, as when the industry hires well-​ connected Washington politicians as lobbyists, and in the New York tri-​state area, as reflected in the lavish contributions to the campaigns of senators from the region around Wall Street. However, there are thousands of smaller regional banks, savings-​and-​loan banks, credit unions, loan servicers, and other firms that participate in the flows of finance through the economy that share a similar stake in ensuring unfettered freedom to make and manage loans, distributed throughout the country. When Sallie Mae sought to fend off regulation, for example, it rallied people to sign petitions to protect jobs in communities where private lenders and servicing companies were located. In one Indiana town, more than 81,000 people signed a petition demanding that Congress refrain from ending the use of federal guarantees for student higher education lending.73 The pooled power of locally based financial firms, coupled with the concentration of financial and political power in New York and Washington, has proven a formidable barrier to reform. When government is unwilling to finance public goods provision by taxation, and instead using federal guarantees of private lending to achieve public policy objectives, it creates a wide opening for the financial industry to benefit at the expense of the public.

6.5.  Finance and Inequality The financialization of the economy has made a significant contribution to the growth of economic inequality. Detailed analysis of the composition of the top 1% of income earners found that 28% of the CEOs in the financial sector and 26% of those of hospitals are in that category; fully 10% of all employees in the investment and securities industries belonged to the top 10%. 14% of the top 1% are from the FIRE sector.74 As of 2006, after controlling for education, the mean employee in finance earned 50% more than employees in other branches; but for executives in finance, the premium was 250%.75 Kaplan and Rauh report that over the 1994–​2004 period, the share of top executives in the financial sector among the top income brackets (top 1%, top 0.01%, and top 0.001%) has

 

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risen faster than any other category.76 The major reason for this increase in the growing gap between finance and other sectors was deregulation, which allowed banking executives to make high-​return investments with low risk, thanks to government guarantees against failure. Because overall wages in the finance industry rose much faster than did wages in other sectors, adjusted for education, in the period after 1980, and because the finance sector itself grew as a share of the economy, the finance sector alone contributed between 15% and 25% of the overall increase in wage inequality in the United States after 1980, according to calculations by Thomas Philippon and Ariell Reshef.77 This was of course most marked at the top end of the wage distribution, since top-​end wages in the finance industry rose relative to the wages of other employees. The average total compensation in 2018 for the CEOs of the top four American financial institutions—​JPMorganChase, Bank of America, Wells Fargo, and Citigroup—​was over $19 million. I have argued that the profits in the finance industry are rising not because of a greater return to capital from productivity or a shortage of capital, but because of the growing share of rents in the markets for goods and services generated by the market power of firms.78 These rents are recycled into the financial industry. The financial industry also converts the income generated by the other sources of high rents into financial wealth. It is a primary channel by which inequality in market incomes is converted into far greater inequality in wealth. By creating high-​risk investment outlets for high-​income individuals, with the risk of loss mitigated by implicit government guarantees against failure, the financial industry widens inequality in access to the opportunity to accumulate wealth over time. The degree to which these higher profits are pushing capital share upward is debatable, because a growing share of profits is being absorbed by management compensation. From a comparative perspective, it is the case that the loose regulatory environment of the United States has not resulted either in high output or productivity growth relative to other OECD countries. The federal government’s efforts to stimulate the economy since the Great Recession by injecting greater liquidity into the monetary system has had little beneficial effect in raising productive investment, but has raised the value of stock shares. The effect is to widen inequality. Partly in response to the deep partisan deadlock in Congress, which hindered fiscal policy as a tool, the Federal Reserve undertook four rounds of “quantitative easing” (QE) in 2009–​10, 2010–​11, 2012–​14, and 2019–​20 (the last in response to the pandemic). QE refers to Fed purchases of Treasury bills and other fixed-​income securities on a massive scale in order to reduce interest rates and encourage borrowing for productive investment. The evidence indicates that QE has had only a negligible impact on capital investment, but has raised it stock market values considerably. Figure 6.9 tells the story.

 



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Quantitative Easing: boosted stock market prices more than business investment

Total federal reserve assets, trln $

.8

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.4 Federal Reserve total assets, trln $

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Sources: https://www/federalreserve.gov/monetarypolicy/bst_recenttrends_accessible.htm https://finance.yahoo.com/quote/%5EGSPC/history?period1=1181174400&period2= 1609372800&intervel=1wk&filter=history&frequency=1wk&includeAdjustedClose=true Net domestic investment, private business: FRED St. Louis [https://fred.stlouisfed.org]

Figure 6.9:  Effect of Quantitative Easing on Stock Market Prices and Business Investment

The graph shows a sustained rise in the S & P 500 index from the spring of 2009. This resulted directly from the Federal Reserve’s QE policy, which had a major effect in raising stock prices but a much smaller effect in stimulating business investment.79 The Fed pumped about $3.8 trillion worth of assets into the financial sector with the aim of increasing consumption, employment, and investment. Undoubtedly QE played a role in accelerating economic recovery following the Great Recession. Its effect on raising wealth at the top was much greater, however, than its effect on incomes and wages in the middle and lower parts of the distribution. Quantitative studies show that, quarter by quarter, the flow of Federal Reserve assets is closely correlated with the S & P index (Pearson’s r =​0.81) but much more weakly correlated with business investment (r =​0.385).80 It is clear from the data that the wealth of owners of stock benefited more from the QE policy than did median incomes. Although QE was certainly not the only reason for the steady appreciation in equity prices after 2009, it was a major factor, according to careful econometric analysis.81 And because stock ownership is heavily skewed toward the most affluent, the benefits of QE flowed most of all to those who needed them least. (Recall that Chapter 2 showed that only one-​third of households with incomes below the median owns stocks, whereas the top 1% own 84% of the total value of all stocks.)82

 

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As interest rates have fallen, so have total rates of return on equities, even as stock prices have risen.83 The risk-​free rate of return in the US financial markets dropped to nearly zero at the height of the COVID-​19 pandemic, while the expected risk premium changed much less. As a result, the expected return on stocks has fallen to a 60-​year low.84 Investment firms have therefore sought high returns in new markets, such as those discussed above—​securitized subprime mortgage market, the student loan securities market, air ambulance services, emergency rooms, and nursing home companies and the like. Likewise the high returns in markets created by privatizing public goods, among them charter schools and prisons, where political influence restricts competition and shifts investment risks to taxpayers, makes privatization of public goods attractive for investors. Therefore the political ties between the financial industry and government help explain how the rate of return to capital can exceed the growth rate of the economy over long periods of time—​that is, as Thomas Piketty argues—​r can exceed g for protracted periods. It has been estimated that over a 150-​year span, the weighted rate of return in most countries and globally has been twice that of the growth rate of the economy.85 Certainly financial globalization has greatly increased the ability of investors in one national market to benefit from opportunities elsewhere. For example, in the United States, facing intense pressure to make up for decades of underfunding and mediocre performance, public pension funds have invested heavily in Chinese technology stocks. Between 2010 and 2019, US investment managers sank almost $13 billion of private-​equity capital into China in transactions valued at $300 million and more.86 However, as Chapter 8 will show, a portion of the high returns generated by Chinese technology giants until 2021 owed to the cultivation of political connections by their owners—​ just as the recent political constraints on the sector led to substantial losses in asset values.87 Although dynamic entrepreneurship has certainly driven much of China’s economic growth in the past four decades, the close personal ties between the largest nonstate companies and government officials have restricted competition and encouraged the extraction and sharing of rents. Investors in other countries looking for returns much higher than those achieved in more competitive markets are understandably drawn the politically protected rent streams of other countries governed under alliances of great wealth with unaccountable power. Economists increasingly believe that since we have entered an era of long-​ term slow growth, with a high debt overhang and falling interest rates, a more permissive monetary policy will not raise the growth rate. By encouraging financial bubbles, however, efforts to stimulate economic growth by monetary easing will widen inequality and increase the risk of more financial crises.88 On

 



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the other hand, public investment in capital infrastructure and workforce development is far more likely to produce broadly shared economic growth.

6.6.  Conclusions I have argued that the financial industry both creates rents through financial activity and channels rents appropriated elsewhere in the economy into forms of wealth and income that deepen economic inequality. A financial system that is deep and liquid is crucial to the health of a market-​based economy.89 However, where there are market imperfections, rents can be appropriated. Rent-​seeking is a way to benefit from exploiting or creating market imperfections. I have shown that the loosening of the regulatory environment in which the financial industry operated from the 1980s onward, strongly championed by the financial industry and its allies in government, contributed to an enormous expansion of rent-​extracting opportunities. Even the financial crisis of 2007–​8 only temporarily set back the market power of the industry although it resulted in the devastation of millions of people who lost their homes and their jobs. Mildly restrictive regulatory measures that were adopted to prevent such abuses in the future, such as the Dodd-​Frank law and the Consumer Finance Protection Bureau, were substantially dismantled once President Trump took office in 2017. The claim that financial markets are self-​correcting is based on ideology rather than evidence. Market competition requires a set of rules to prevent those with market power from exploiting their advantages, raising barriers for competition and acquiring influence over government. By loosening regulatory controls over the financial industry over the past four decades, the United States has encouraged a number of socially destructive practices, including imprudent mortgage lending and a reliance on subprime mortgage debt as collateral both for loans and for insurance, leaving many borrowers insolvent as housing asset values collapsed. When that bubble burst, lending to many other sectors froze up, contributing to the subsequent economic recession. Small and medium-​ sized businesses faced a devastating credit crunch, whereas large-​scale financial institutions—​those deemed “systemically important” and therefore too big to fail—​prospered.90 Under such conditions, short time horizons contribute to building up of an asset bubble. As the effects of the recession spread, the costs of the bubble’s burst are borne by wider groups in society. The financial industry’s ingenuity in inventing high-​yielding investment vehicles while shifting the risks and costs to others—​the poor and the taxpayers above all—​enabled those in the industry to profit handsomely from the sales, servicing, and insuring of

 

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complex financial instruments. At the level of financialization that the United States has reached, the growth of the financial industry comes at the cost of productive investment and equal opportunity. It deepens income and wealth inequality. Meanwhile, the rents the industry has extracted from manipulating the policy environment have enabled its shareholders and executives to appropriate a growing share of the national income for themselves and to share a portion of them with their friends in government.

 

7

Autocracy and Oligarchy in Russia

7.1.  The Political Economy of the Putin Regime Russia’s invasion of Ukraine on February 24, 2022, while not an inevitable outcome of Putin’s autocratic rule, was its culmination. When Putin launched an all-​out war, he staked his presidency on achieving full incorporation of Ukraine into Russia. Although it was a war of choice, the war gave Putin a further pretext for further centralizing state power and his own personal power over society, economy, and media. The seeds of the ideology of a holy war of defense against the West had been planted long before, but Putin now harvested their fruits.1 What does inequality have to do with the war? The answer lies in the way Russia liberalized its economy in the 1990s. To open the Soviet economy to markets, Russia’s rulers forged a bargain with the oligarchic “early winners” who controlled the assets that could command market prices with the opening of market activity. And although individually, some of those who amassed great fortunes have fallen from favor, collectively they remain powerful. This applies not only the handful at the top whose superyachts are eye candy for the press, but also the many regional-​level tycoons who dominate local economies. They build the politicians’ villas and retreats, fund their election campaigns, and finance the state media outlets that pour out a stream of propaganda. In return, they enjoy a lavish way of life. The war in Ukraine resulted in substantial losses for them, but it did not prompt Putin to arrest them and redistribute their property, and with few exceptions they have continued to maintain their ties to the regime. Over time, the balance of power in the relationship has shifted. Under Yeltsin, the oligarchs held the upper hand. Today the relationship is tilted in favor of the regime. Nonetheless, the relationship still rests on mutual dependence, mutual vulnerability, and mutual benefit. The immense wealth of the oligarchs results from a growth model that concentrates gains from growth in the hands of a narrow stratum of owners and managers of economic assets. This economic model has meant that the stratum The Returns to Power. Thomas F. Remington, Oxford University Press. © Oxford University Press 2023. DOI: 10.1093/​oso/​9780197685952.003.0007

 

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of independent property owners in the middle is thin and exposed to the risk of arrest or expropriation. Some elements of the middle class certainly have gained in income and security under Putin, particularly those in high-​paying state service jobs and especially those in the security forces. At the same time, though, the share of the middle class that is based in private property and entrepreneurship has steadily declined. As a share of national income, income from entrepreneurial activity has fallen from close to 20% in the mid-​1990s to less than 6% today. At the same time, the share of state employees in the middle class ranges anywhere from half to two-​thirds. And a middle class that depends on employment by the state does not offer a foundation for political demands for the rule of law, rights of representation, and political equality.2 During Putin’s time in power, periods of economic growth have tended to exacerbate income and wealth inequality because income gains from growth flow disproportionately to higher-​income groups.3 Periods of slow or negative growth have reduced inequality by slowing income gains more at the top than at the bottom. The strong resource dependence of the economy has limited income growth in the middle of the distribution and contributed to the high disparities in growth across regions. At the same time, a large proportion of the labor force has been unable to move into higher-​paying jobs. However, inefficient systems of tax and social insurance contribution collection (due in part to high rates of informal employment) limit the state’s ability to target social assistance to those most in need. These factors have rendered Russian social policy relatively nonredistributive. Therefore, even though extreme poverty has largely been eliminated, around 40% of Russian households face a situation where the family budget cannot afford to purchase both food and clothing; 10% say they cannot afford food for their families.4 Food prices are not subsidized, and families living just above the poverty line are not provided with cash income supplements for food and medicine unless they qualify for assistance due to invalidity or other special needs. A survey conducted by the Higher School of Economics in the summer of 2022 found that 69% of the population were experiencing financial difficulties, the same figure as in 2021 and three percentage points higher than in 2020.5 Economic precarity is the lot of a considerable segment of the population. Economic growth under Putin has done little to increase the numbers or incomes of those in middle-​income groups, even if we define the middle class mechanically as the share of the population whose incomes fall between two-​ thirds (or three-​quarters) and twice the median income. About 30% of the population receives incomes that are lower than three-​quarters of the median income of their region; another 52% are in the middle-​income group, receiving between three-​quarters and twice the regional median. Among individuals older than 60, about 52% receive less than the regional median.6 The share of Russian households in the middle-​income group is lower even than in the United States,

 



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and far lower than in other developed industrial economies.7 Likewise, Russia has an even larger share of the population in the low-​income group than does the United States, and over twice the share of such countries as Denmark and the Netherlands. Although the economy grew overall at a rapid rate during the first decade of Putin’s presidency, this growth was based on recovery and rising world oil prices rather than modernization and diversification of productive capacity. Since then, the combined effect of the global recession of 2008–​9 (the economy shrank by almost 9% in 2008) and the exhaustion of recovery-​based growth have led to the return of economic stagnation. The stagnation reflects the fact that Russia’s economy has become more, rather than less, dependent on revenues from the oil and gas sector as opposed to knowledge-​intensive production. And, as in the United States, the share of the financial industry’s contribution to GDP has risen even as machine-​building’s share has declined. Russia’s dependence on revenues from oil and gas extraction and processing also means that the state budget depends heavily on this sector. In 2013–​15, oil and gas revenues made up a little over half of state revenues. When world oil and gas prices fall, therefore, the budget faces a strain. State spending (on large-​scale infrastructure projects, prestige projects, and defense) is the main stimulus that the government can deploy to increase growth rates, but these do not lead to sustained growth and tend rather to increase the deadweight burden of state spending on the economy. The Ukraine war is further depressing growth. Since 2014, mean real incomes have fallen, whereas incomes at the top have risen. Figure 7.1 shows the growth rate of inflation-​adjusted mean personal income, and Figure 7.2 shows the trends in the growth of the top 1%’s share of income and wealth. Considered quarter by quarter, and comparing year-​on-​year growth of successive quarters, in only four of the last 33 quarters has mean real income growth been positive. Since these figures represent mean incomes, they mask how income growth has been distributed across income groups. Following the recession that began in 2008, incomes at the top rose after 2015 before leveling off, enabling the top 1% to accumulate further wealth. The Credit Suisse Global Wealth Report estimates of wealth inequality are still higher. According to this report, the wealthiest 1% in Russia controls 58.2% of all wealth, which is by far the highest level of concentration in the world; the next contender is Turkey (42.8%), followed by South Africa, India, and Thailand (all 40%–​41%).8 The economic model of Putin’s regime, while benefiting officeholders and oligarchs, places major political obstacles in the way of reform. Even the idea of replacing the current flat income tax with a progressive scale is politically untenable for the regime. President Putin explicitly acknowledged as much in

 

Russia: Change in mean real income, 2008–2022, by quarter, year-on-year growth In most quarters since 2014, real income growth has been negative

Percent year-on-year change, by quarter

10

5

0

–5

–10 2008q1

2011q3

2015q1

2018q3

2022q1

Source: Rosstat

Figure 7.1:  Growth Rates of Real Personal Income in Russia Russia: top 1% shares of income and wealth, 2000–2021

.5

Top 1% share of wealth

As % of total

.4

.3

Top 1% share of income (pretax) .2 2000

2005

2010

Source: WID World

Figure 7.2:  Top 1% Shares of Income and Wealth

2015

2020

 



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one of his “open line” broadcasts. In June 2018, an audience member asked the president why Russia could not increase state revenues by raising taxes. The president’s response is worth quoting in full: V. Putin: One of the sources [of additional revenue] would require a certain tuning up of the tax system. The measures you named, such as the personal income tax, that is, the tax on the incomes of physical persons, or a tax on sales, have been discussed among the government and at the expert level. As we know, many are proposing to change the personal income tax, including political parties that are in the opposition but are represented in parliament. We have thought about this a long time. At first glance, a differentiated scale for taxing personal incomes appears to be more just, that is, those who receive higher incomes should pay more. But practice is more complicated than these theoretical formulas. What does practice tell us about the differentiated personal income tax in past years? A. Kondrashov [the moderator]: People hid their incomes. V. Putin: Exactly right. As soon as it is introduced, a part of the citizens, those who receive higher incomes, begin to use various means to hide their incomes. Immediately people start receiving their pay in envelopes [i.e., in unreported cash] and so on and so on. That is, the fiscal effect is nearly zero, but there is a lot of noise, and overall a worsening of the investment climate. So this has been deemed inexpedient.9 Putin’s explicit admission that tacit and overt resistance to higher personal income taxes from those who are well-​off would nullify any benefit from a more progressive system confirms that low administrative capacity, and lower political will, make it politically difficult to reform the tax structure in such a way as to impose losses on the rich. War makes it far less costly for the regime to impose losses on the wealthy than does the prospect of tax reform or open market competition. Even when Putin did slightly raise the personal income tax rate in 2020—​to 15% for any income above 5 million rubles—​he added telling exemptions from it: higher income is not taxable if it is from the sale of inherited property, gifts from “close relatives,” or the sale of movable property such as villas and yachts that the individual has owned at least 3 years.10

7.2.  Economic Transition in Russia In Russia, as in other communist states, economic liberalization meant replacing a state socialist, planned economy with the institutions of a market

 

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economy: private property, a profit orientation for firms, and markets for labor, finance, goods, and services. In place of the planned allocation of productive resources, including labor, prices became the principal mechanism for allocating resources. Russia reserved a substantial sector of the economy for state ownership and procurement, while opening most of the rest to the forces of supply and demand. Some state-​owned enterprises (SOEs) were fully privatized, others were commercialized but kept under state ownership, while still others remained directly administered by the state. The SOEs included enterprises the government deemed to be strategically important, including major producers and distributors of energy resources, electric power and other utilities, telecommunications, mineral and other natural resources, and a selection of industries considered crucial to state interests for other reasons, such as vodka in Russia (which for the most part became regional government monopolies). The economy was opened to privately owned businesses, free foreign trade, and foreign investment outside of strategic sectors. The transition to a market-​oriented economy meant opening up markets for labor. Under central planning, most jobs in the industrial sectors of the economy had been filled by administrative allocation. The plan determined how many people were to be trained for each particular occupational category and level, and assigned people to places of work. Wage scales in industry were fixed and closely controlled. Of course, there was considerable slippage between the plan and the actual flow of labor resources. In the collective farm sector of the USSR, there was no centralized system for allocating or paying labor. In some periods of Soviet history, the economy relied on direct conscription of labor.11 Broadly speaking, coerced labor remained a core organizational principle of the Soviet economy, embodied in a number of institutions: the residential registration system—​the propiska—​which limited workers’ ability to move freely to change jobs in other city (a system that has lingered in de facto forms to this day) the “distribution system” (raspredelenie), which determined where the graduate of a higher educational institution would be assigned to work. Although fewer and fewer people were subjected to this, it only ended with the demise of central planning in 1991, and the prohibition on collective farm workers’ holding internal passports remained in force until 1966.12 It was with this history in mind that reform-​minded economists such as Nikolai Shmelev and Vasilii Seliunin argued that a competitive market for labor was an essential condition of both economic development and basic social justice.13 An effective labor market would curb the appropriation of rents from the use of state power to conscript workers or prohibit farmers from leaving the countryside. Although much of the focus in the literature on the way transition shaped inequality in the postcommunist world has been on privatization,14 the most important driver of income inequality in Russia is the effect of market reform

 



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on the distribution of labor income. As in the United States, so also in Russia and China: the trend toward higher income inequality over time results from the difference between income growth at the lower end of the distribution and the far faster growth of top-​end incomes. Likewise, two of the most important consequences of liberalization for inequality in the United States—​the concentration of income gains at the very top and efforts to avert the redistributive threat of democratization—​are evident as well in Russia. And as the next chapter will show, a similar process has occurred in China. The history of Russia’s economic transition has been recounted many times.15 Here I will highlight only a few salient points, focusing particularly on the debate over how to stimulate competition and curb monopoly power through privatization and stabilization, the rise of market power by dominant state-​owned and private firms, and the impact of administratively generated rents on income inequality.

7.2.1.  Shock Therapy Russia pursued a three-​ pronged program of market reform in the early 1990s: macroeconomic stabilization of the currency by bringing aggregate supply and demand into balance; liberalization of markets by lifting many controls on domestic production and trade, including foreign trade; and privatization of state assets. Similar programs were applied in varying degrees in several other postcommunist countries, such as Poland.16 The template was the IMF-​ enforced structural adjustment programs in the 1980s in several Latin American countries, which were designed to defeat hyperinflation brought about by a gross excess of government spending and debt over revenues. Wherever structural adjustment was applied, it produced widespread pain as prices skyrocketed while wages and employment sank. The policy goal was to force governments, enterprises, and citizens to adapt to an environment where budget constraints were tight.17 However, the legacy of communism made stabilization in the post­communist world far more difficult than in Latin America. Communist regimes had carried out a far more sweeping destruction of economic institutions. In the communist world, many fundamental features of a market-​oriented economy were missing, including a system of market prices and market institutions. Innovation and entrepreneurship were dangerous, often illegal. Enterprises did not compete, because the profit motive was replaced by central allocation of goods and centrally set prices. Moreover, in Russia, the obstacles to market reform were even steeper than in other communist countries, including China. Stalin’s economic growth model sought economies of scale by concentrating production of particular

 

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goods in large-​scale enterprises. Consequently, many large enterprises entered the new era with near monopolies in particular goods. In 1988, a small number of giant enterprises with more than 2,000 employees, a group comprising only 9% of all enterprises, produced over 60% of all output.18 This meant that once state price and production controls were freed, these enterprises could raise prices with impunity and collect monopolists’ rents.19 Although the aggregate level of market concentration was not appreciably higher than in the United States, Soviet industrialization left behind an extremely high level of enterprise concentration in regional product markets and a paucity of small and medium-​scale firms.20 According to Soviet statistics, over half of industrial output in 1984 was produced by enterprises directly subordinate to the central government.21 A group of fewer than 1,500 giant firms employed one-​ third of industrial labor.22 These large firms also tended to dominate the cities and regions where they were located.23 At the point of the transition, over 90% of Russian cities and towns had nine or fewer civilian firms, and almost half had only a single firm. This left many cities highly vulnerable to economic shocks as supply chains and markets were disrupted when planning broke down.24 This level of concentration gave large enterprises substantial bargaining leverage vis-​à-​vis the national and regional governments. Since Russian industrial firms were traditionally responsible for a broad range of social welfare functions—​building and maintaining housing for their workforces, and managing health, recreational, educational, and similar facilities—​such towns are heavily dependent on these firms for the provision of basic social services as well as employment. Therefore economic transition created severe problems for maintaining social welfare since local governments were unable to assume financial responsibility for these tasks. Moreover, Russia had devoted a huge share of its resources to military production. Since the real level of Soviet GNP per capita as of 1985 was something like one-​third that of the United States, the actual share of gross economic output devoted to the military sector was around 25%, not 14% to 15%, as most Western analysts previously believed.25 In some regions, at least half the workforce was employed in defense plants. The end of the Cold War and the cutback in military spending hit such plants very hard, and it was often impossible for them quickly to retool equipment, retrain workers, and find new markets. Russia is also geographically vast. Creating new infrastructure, such as highways and rail lines, high-​speed data transmission and microwave communications links, and organizational structures spanning Russia’s vast territorial expanse would be a huge task for any economy, let alone one needing to finance a massive program of retooling and restructuring. The huge physical scale of Russia’s economy imposed limits on the speed of change.

 



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Economic liberalization inflicted enormous suffering for ordinary citizens as prices soared, and recovery was extremely slow. Yet most observers fail to recognize how far from being comprehensive shock therapy was in practice. Yeltsin’s government, headed by Egor Gaidar, lacked meaningful control over most levers of state power, from the central bank to the ministries to the regional governors. The policies were full of exemptions, and many enterprises and governments failed to respond to them as the theory of restructuring presupposed. Nearly the only available instrument was the draconian use of tax hikes, spending cuts, and monetary tightening, in an effort to stem the huge increase in price inflation following the lifting of price controls. However, Gaidar’s team had inherited an economy on the verge of breakdown. Much of the power of the central government had disintegrated by the time Gaidar entered office.26 The central government had little information and less control over actual economic activity in much of the country. That was one reason the speed of recovery following the 1998 default was so unexpected to Western advisers.27 Neither liberalization nor stabilization was ever more than partly enforced. Enterprise managers, accustomed to assured sources of supply and credit, found it nearly impossible to begin producing for new markets. Directors of top-​priority defense plants that produced missiles that could deliver payloads to destinations anywhere in the world found it unthinkable to have to develop new product lines. Factories cut back on production, reduced workforces, stopped paying their bills and taxes. The economy fell into a severe recession. Those directors of state and private enterprises who did want to retool or expand operations, however, faced a severe credit crunch. The state cut back on the supply of cheap loans and credits to get inflation under control. Organized crime rackets preyed on any firm enjoying even a little success in the market. Firms that were politically connected were able to survive by winning cheap credits and production orders from government, which dampened any incentive they might otherwise have had for improving productivity. This resulted in a situation that the McKinsey Global Institute, in a comprehensive report on Russia’s economy in 1999, summed up by pointing out that the most productive sectors of the economy were the least profitable ones, while the least productive sectors were the most profitable.28 The size and relative power of enterprises in their regions gave them considerable bargaining leverage vis-​à-​v is the central government. More often than not, they ignored the imposition of tight budget constraints, monetary discipline, and cutbacks in state procurement orders. Rather than shutting down production and retooling, enterprises continued to carry out producing as before, bartering their goods rather than selling them. Many paid taxes and wages in kind.29 Regional governments, rather than allow mass unemployment and the breakdown in social services, found ways to keep plants open

 

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and production running. By some measures output per capita fell, by 1996, to less than half its 1990 value. Workers and their families got by turning to off-​ book employment.30 New enterprises did emerge, but much less frequently than in other postcommunist environments such as Poland or China. In fact, the number of small enterprises, normalized to population, fell from the early 1990s into the 2000s. The median region had fewer than five small enterprises per 1,000 population as late as 2005. Only in the latter half of the first decade of the 2000s did the small business sector begin expanding again, but it still remains small. Stabilization and liberalization were throttled from the beginning, not, as some expected, by a massive popular uprising against the program, but rather by the quiet efforts of those with the political leverage to carve out exemptions from it for themselves. The government subsidized imports of many crucial goods in order to ensure an adequate supply, but intermediaries immediately resold them on the market at inflated prices.31 Enterprises with goods to export, such as natural resources, simply ignored the government’s export tariffs. Directors of major enterprises wheedled credits from the central bank (which was not under the government’s control) or persuaded ministries to place orders for products simply to keep production going.32 Industries formed their own pocket banks to supply them with cheap credit to maintain production regardless of market demand. In a few cases, a former ministry dissolved itself in such a way that its financial department formed a bank to service the enterprises that once were administered hierarchically by the ministry. In other cases, the government created a holding company to replace a ministry and set up a bank to finance the company’s operations. Most common, however, were conglomerates created by new, nominally private banks.33 President Yeltsin himself often undermined the reform program by using his decree power to create rent streams for regional governments, social organizations, and wealthy individuals whose support he sought to cultivate.34 One presidential decree created a tax-​free zone in the ethnic republic of Ingushetia. Others granted exclusive rights to Afghan veterans’ groups and the Russian Orthodox Church to import cigarettes and liquor duty-​free for resale at commercial prices.35 Another decree turned control of state television Channel 1 over to Boris Berezovsky. Several specifically ordered the privatization of particular enterprises, often at the behest of particular individuals. Not surprisingly, such decrees therefore tended to be carried out, as opposed to decrees seeking to curtail rents. In general, as Yeltsin’s team of advisers observed in their collective memoir of the Yeltsin presidency, decrees tended to be carried out only if it was in someone’s interest to see that they were fulfilled.36 Perhaps the most notorious case of the capture of the president’s decree power by special interests was the loans-​for-​shares program, discussed in more

 



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detail in Section 2.4 below. Yeltsin launched the scheme through a series of decrees, the first of them issued in August 1995. Subsequent decrees extended to other oligarchs the same opportunity to organize, rig, and win tender auctions for other assets. For example, a decree giving Boris Berezovsky the right to acquire the Sibneft’ oil company through a special loans-​for-​shares auction was drafted and signed in a matter of days as a result of Berezovsky’s privileged access to the president.37 Such decrees were readily executed because they granted control, and eventually ownership, rights to wealthy private individuals with a stake in making use of the rights they were given by the decrees. Equally important, fulfillment of the decree was supported by elements in the government, especially Anatolii Chubais, head of the State Privatization Committee, who were motivated both by the urgency of filling the government’s coffers with new revenues and by winning the help of the oligarchs in Yeltsin’s coming reelection campaign. Because the Gaidar government lacked full control over the government, it could not completely shape the structure of incentives to which enterprise managers responded. The credibility of its policies was never secure. Since the effectiveness of a stabilization program depends on producers’ calculation of the government’s commitment to staying the course, the government’s imperfect control over the money supply distorted the effects of the policy. The government did not carry price liberalization out fully in any case, keeping heavy controls on energy and electric power, which may have protected consumers and producers but at the cost of allowing severe price distortions to accumulate throughout the economy.

7.2.2.  Privatization The partial stabilization program was followed shortly afterward by a phase of privatization of state assets. In contrast to shock therapy, privatization enjoyed public support, at least at first, and offset the unpopularity of stabilization. Even before the USSR’s dissolution at the end of 1991 and the launch of shock therapy in January 1992, economists inside and outside Russia had begun to debate the optimal sequence of market reform. Some held that under the conditions of high concentration of production in a small number of giant enterprises, privatization would bring about enormous monopoly profits unless the enterprises were broken up first and forced to compete. Others held that a greater problem than monopoly power was the large monetary overhang and repressed demand that would drive up prices. The latter view held that the tightening monetary and fiscal policy coupled with deregulation of prices would cure the harms done by monopoly.38 Moreover, the latter group believed, giant enterprises were potentially more efficient than their daughter enterprises and

 

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would be attractive targets for private investment. Market competition would follow of its own accord so long as privatization and the emergence of a new, private sector proceeded unimpaired.39 Ultimately, the view holding that the high level of concentration in the economy at the point of reform was not the major problem prevailed. As James Leitzel put it, “Industrial concentration is not an important reform issue, irrespective of its detrimental impact on the Russian economy.”40 This position was justified by the faith that “with free enterprise, barriers to entry will largely disappear.” Market reform would do “much of this work automatically.”41 Although major firms might seek protection from being forced to privatize, they were more likely to be seeking “better terms for privatization.” The possibility that monopolistic firms might prefer to invest in seeking protection from competition by allying with sympathetic political forces to taking entrepreneurial risk was overlooked. Rather, the assumption was that once property rights were established, monopoly rents would be dissipated through competition. That corporate managers and politicians would prefer to share rents by blocking competition seems not to have occurred to the reformers. In the late 1980s and early 1990s, a passionate pro-​market ideology pervaded Russian intellectual circles. One of the most prominent advocates of market reform in the late Soviet period, academician Nikolai Shmelev, argued for the dismantling of the planning system in favor of a market-​based system on the grounds that it would increase the range of choice for both consumers and workers, who were subject to the arbitrary control of the planners. An administratively run economy, moreover, fostered resentment and passivity. Shmelev even went so far as to argue that “all that was efficient was moral”—​a hyperbolic overstatement but one based on his core argument that the economy of state socialism had been founded on compulsory labor.42 However, from the start, movement toward liberalization was compromised by manipulation on the part of insiders. Spontaneous privatization of state assets began well before shock therapy. As early as 1986, Mikhail Gorbachev modified Soviet law so as to let individuals and their family members open small businesses and small groups of people to create commercially oriented cooperatives. Numerous small firms sprang up, often using the premises, materials, and labor of state enterprises. Large state enterprises and even entire ministries began to reorganize themselves into corporate forms such as “concerns” and “associations” to be able to engage in profit-​seeking activity without risk of failure.43 For example, the minister of the Soviet gas industry, Viktor Chernomyrdin, turned the entire ministry into a “concern” in the summer of 1989. Later this became the gas monopoly Gazprom.44 Then shortly before the breakup of the USSR, he used his position as chairman of Gazprom and minister of gas to take over the gas-​exporting arm of the Soviet Ministry of Foreign Trade, enabling Gazprom to sell state gas on world markets at world market prices.45

 



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In the same period, KGB, party, and Komsomol officials began liquidating assets, opening bank accounts abroad, and transferring large sums into them.46 With these funds, insiders were able to conduct commercial operations by selling goods and services obtained at low state-​plan prices at much higher market prices. The KGB was not ideologically opposed to privatization; its collective goal was to restrict control over privatized enterprises to a small circle of cronies, whose property rights would depend on the KGB’s favor. Similarly, managers of state enterprises had begun to reorganize their enterprises for commercial purposes. Many took advantage of laws allowing them to open profitable sideline enterprises that allowed them to produce for the market using state-​ supplied labor and materials. Often, managers skimmed off the profits, while letting the state enterprise absorb the costs. In other cases, managers joined their enterprises into new holding companies with their own pocket banks.47 While recognizing that such acts of “spontaneous privatization” represented theft from the state, reformers nevertheless greeted them as positive steps toward a more entrepreneurial and efficiency-​oriented economy that would create a demand for secure property rights.48

7.2.3.  Voucher Privatization The Russian Supreme Soviet approved legislation on the privatization of state enterprises in July 1991. In December, Yeltsin issued a decree stepping up the pace of privatization and changing the procedures envisioned in the July laws.49 Privatization of thousands of small and medium-​sized enterprises, and a smaller number of large firms, proceeded under the methods that the laws and decrees laid out. One method was for workers and managers who had leased their firms simply to buy them. Another was to hold an auction or to invite bids from investors proposing alternative reorganization plans. A third was to reorganize the firm into a joint-​stock company and issue shares, in which case the workers and managers could acquire a fixed proportion of the shares at a discount. In the forms of privatization used in 1991 and the first half of 1992, buyers used cash rather than state-​issued vouchers. Auctions and the sale of shares were supposed to serve the goal of efficiency by creating a material interest on the part of an investor in the value of the newly acquired assets. It was hoped that investors, be they the workers of the firm themselves or outside buyers, would be interested in maximizing the return on their investment by seeing that the firms were run profitably and efficiently. But when efficiency became the principal objective of cash privatization schemes, fairness was jeopardized. Cash privatization had the effect of making the rich richer and giving ownership of enterprises to the officials who had run them before. Ordinary citizens often were excluded from benefiting from the most profitable opportunities, as insiders acquired the

 

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stock of the most promising firms. And the poor, of course, had no chance at all to buy shares. In the interests of dispersing ownership rights as widely as possible, parliament’s law envisioned that all citizens would be given special bank accounts to buy shares of privatized enterprises. Under the voucher privatization program, every citizen of Russia was to be issued a voucher with a face value of 10,000 rubles. People would be free to buy and sell vouchers, but they could only be used to acquire shares of stock in privatized enterprises through auctions where voucher owners could bid vouchers for shares of enterprises. People could also use their vouchers to acquire shares of mutual funds investing in privatized enterprises, or they could sell them to other people. The program was intended to ensure that everyone became a property owner instantly. Politically the aim was to build support for the economic reforms by making citizens into stock owners and thus giving them a stake in the outcome of the market transition. The designers of the program hoped that even though the voucher privatization program did not itself create new investment capital, it would eventually spur increases in productivity by creating meaningful property rights.50 The State Privatization Committee was unwilling simply to give away Russia’s vast capital stock to the powerful state enterprise directors. Instead, it wanted to diffuse ownership rights as broadly as possible. The political realities, however, dictated that the government allow enterprise directors certain advantages. In the short run, at least, the consent of the directors to the program was essential to maintaining economic and social stability in the country. The managers could ensure that labor did not erupt in a massive wave of strikes. They represented one of the most powerful collective interests in the country. The government, therefore, allowed a good deal of “insider privatization,” in which senior enterprise officials acquired the largest proportion of shares in privatized firms. As a result, many managers could use the assets of the enterprises to operate profit-​ making commercial firms while shifting debts and losses to the government. Many engaged in asset-​stripping, for example, selling scrap and raw materials on the domestic and international markets. A number of manager-​owners built fortunes in this way. All vouchers were to have been used by December 31, 1993. President Yeltsin extended the expiration date until June 30, 1994. By that time 140 million vouchers had been exchanged for stock out of 148 million originally distributed, according to Anatolii Chubais.51 Some 40 million citizens had become property owners. About 70% of large and medium-​sized firms and 80% of all small businesses had been privatized. The voucher privatization phase had ended. The next phase was to bring about the privatization of most of the remaining state enterprises, but by means of auctions of shares for cash. This also included the infamous “loans for shares” scheme, detailed in the next section.

 



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By 1996, about 90% of industrial output was being produced by privatized firms, and about two-​thirds of all large-​and medium-​sized enterprises had been privatized.52 As of 2000, around 70% of Russian GDP was produced in the private sector.53

7.2.4.  Formation of the Alliance of Wealth and Power In 1995–​96 and again in 2000–​2003, the early winners of privatization and liberalization entered into a pact-​like relationship with the regime. We must remember that Russia’s oligarchs acquired their wealth and power more through the commercialization and privatization of existing state assets than through technological innovation or de novo enterprises. Some had been well-​placed officials in the party, the KGB, the Komsomol, and government ministries who used their insider connections to liquidate organizational assets and convert them into commercial enterprises.54 Others were outsiders who began modestly as small-​scale traders and gradually created larger banks and businesses, generally cultivating protectors and exploiting connections inside the system. By the time Russia became independent, some of these new players had already become wealthy. As the Yeltsin-​Gaidar government pursued radical economic reform beginning in 1992, combining macroeconomic stabilization with mass privatization of state assets, the oligarchs exploited their insider connections to amass further wealth. They then exercised their collective political influence to block the possibility of a renationalization of their assets through a political reversal. The alliance of oligarchs and the Kremlin was based on their joint vulnerability stemming from the economic crisis triggered by the shock therapy program.55 From the beginning, Yeltsin’s government faced massive resistance from among the state bureaucracy and opposition from communist and nationalist parties. As the presidential election of 1996 approached, Yeltsin’s falling approval ratings prompted his advisers to find ways to tap into the material and political resources of the tycoons who became known as oligarchs through schemes such as loans for shares. In 1995, faced with an acute shortage of operating revenues, plummeting approval ratings for the president, and an impending presidential election, Yeltsin’s advisers adopted a privatization scheme under which the government auctioned off controlling blocs of shares in some of Russia’s most lucrative companies to industrial and financial groups as security for loans to the government for its immediate needs. Under the terms of the loans-​for-​shares program, if the government did not repay the loans in a year’s time, the lenders acquired title to the blocs of shares. In this way, controlling interest in several of the major firms wound up in the hands of a small group of oligarchs. The scheme was rigged

 

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beforehand to ensure that only the organizers would win the auctions. Both at the time and since, the plan was widely condemned as deeply corrupt. However, it accomplished two ends: it sealed the mutual dependence of the government and a handful of extremely wealthy tycoons, and it brought an infusion of revenue to the government. As journalist David Hoffman put it, “Loans for shares was the first phase in Yeltsin’s reelection campaign. It was the weld between the tycoons and the Kremlin, the embrace of wealth and power.”56 It was “a crude trade of property for political support,” according to another journalist.57 Boris Berezovsky played a leading role in forging this opportunistic alliance. Berezovsky exemplified the new group of ambitious and unscrupulous entrepreneurs who exploited connections to accumulate wealth, then mobilized to support Yeltsin’s reelection as president in 1996. Even before the USSR collapsed, Berezovsky was in business importing used cars from Germany and reselling them in Russia. Thanks in part to protection from senior figures in government, by 1995 Berezovsky already held substantial blocs in several companies (among them the state airline Aeroflot and the giant automaker AvtoVAZ). He then took advantage of the loans-​for-​shares program to obtain an 8% stake in the state television company ORT. Desperation among Yeltsin’s associates grew as the election approached. At a Kremlin luncheon attended by Berezovsky, Khodorkovsky, and a few other tycoons in early 1996, Yeltsin’s former deputy for privatization, Anatolii Chubais, frankly declared to Yeltsin, “Boris Nikolaevich, your popularity is zero.”58 So dire was the situation that Yeltsin seriously contemplated canceling the scheduled 1996 presidential election.59 Alarmed at the prospect of chaos or a communist return to power, Berezovsky organized a coalition of oligarchs to ensure Yeltsin’s election in 1996. Berezovsky published a manifesto in Kommersant newspaper in April 1996 announced that the oligarchs intended to pool their resources and ensure Yeltsin’s reelection.60 After the election, Berezovsky made no bones about the fact that he intended to cash in on the oligarchs’ victory. “We, the seven richest businessmen, invested enormous sums in Yeltsin’s electoral campaign, hired Chubais as its manager, and ensured the victory. Now we must harvest the fruits of our victory and occupy key posts in the government.”61 President Yeltsin duly obliged by appointing Berezovsky as deputy secretary of the Security Council. Berezovsky considered the dominance of the oligarchs only just: I think two types of power are possible. Either a power of ideology or a power of capital. Ideology is now dead, and today we have a period of transition from the power of ideology to the power of capital. . . . I think that if something is advantageous to capital, it goes without saying that it’s advantageous to the nation. It’s capital that is in a condition, to the greatest extent, to express the interests of the nation.62

 



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Berezovsky’s boast that he and six other politically influential tycoons controlled companies that in turn controlled half of Russia’s wealth was exaggerated, and their coalescence around Yeltsin’s reelection proved to be transient, as they soon resumed fighting over the spoils of their victory.63 The notion of the semibankirshchina—​that is, the “rule of seven bankers”—​took hold as a journalistic cliché but certainly exaggerated the actual extent of their influence.64 Moreover, much of the power of concentrated capital was exercised not by private oligarchs, but by the managers of state enterprises.65 Most importantly, the nexus of corporate and political power not only characterized relations at the federal level, but also extended across multiple sectors and regions. Market domination and cronyism between politicians and enterprise directors—​public and private—​became the prevalent pattern of Russian capitalism. However, in the 1990s, the state’s weakness and the central government’s inability to control the most basic levers of power meant that enterprises were an indispensable source of revenues, employment, and public services. Under these conditions, the oligarchs had the upper hand in relations with political leaders.66 In part thanks to loans for shares, Yeltsin won reelection in 1996 with the help of a small coterie of oligarchs who pumped substantial material and media resources into his campaign. Nonetheless Yeltsin’s popularity continued to fall. Although his approval rose at the time of his confrontation with the Supreme Soviet in 1993 and again when he won reelection in 1996, the trendline was sharply downward over the decade. The percentage of those approving his performance fell from about 40% in summer 1991 to almost zero by late 1999.67 In order to hang on to power, Yeltsin made major concessions to the powerful owners of the firms in the natural resources sector, manufacturing, finance, and the media. Loans for shares was the most conspicuous of these actions.

7.3.  Putin and the New Rules of the Game Yeltsin resigned in December 1999—​probably not voluntarily—​and Putin succeeded him, first as acting president, then in his own right following an election in March 2000. Putin oversaw a substantial new round of market-​ oriented reforms. These were led by market-​oriented economists such as Andrei Illarionov, German Gref, and Aleksei Kudrin. They were evidently motivated by two goals. One was to reinvigorate economic growth by encouraging productive investment on the part of private business. The other was to use national-​level markets to curb the power of regional governors. In early 2003, however, perhaps because world oil prices had recovered somewhat, Putin grew convinced that the state had again conceded too much power to the oligarchs; Mikhail Khodorkovsky’s Yukos oil company was the most conspicuous example. For

 

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whatever reason, Putin shifted to a different economic strategy from spring 2003, emphasizing the need for large state-​owned holding companies to dominate the economy and drive economic development and political control over Russia and its neighbors. In the aggregate, the economy began recovering, but at the expense of competition in the political and market arenas as the forced takeover of Yukos by Rosneft’ set in motion a series of similar acts of renationalization. Over the next several years, Putin established several large state corporations headed by political allies. These he used to take over other companies, both state and private, in such sectors as electric power, mass media, automaking, machine-​building, aviation, minerals, banking, and oil and gas.68 They were both a lucrative source of rents for Putin and his cronies and allies as well as a means of achieving policy goals. They also supplied the Putin-​affiliated party, United Russia, with the financial and organizational resources needed to mobilize wide electoral victories for Putin and executive officials at all levels and maintain solid voting majorities in legislative bodies throughout the country.69 The rents fed corruption at all levels of the system. Putin was and long remained genuinely popular.70 Tight control over the state media is part of the reason. Putin’s media advisers took the view that they could shape public opinion any way they wished, that reality was malleable. Secure in their ability to use their control over the mass media to create uncertainty about what was true and what was not, those in Putin’s orbit believed that “everything is PR.”71 At the same time, it is clearly the case that living conditions improved during Putin’s first decade. American political scientist Daniel Treisman argues that Putin’s high ratings, and Yeltsin’s low ratings, are directly related to trends in public assessments of the performance of the economy. Putin enjoyed a large surge of approval following the annexation of Crimea (the so-​called “Crimea Is Ours,” or krymnash, effect). Support for Putin among the political elites is to a large degree contingent on their belief that he enjoys widespread public support.72A loss of popular approval could trigger a cascade of defections on the part of the elite, much as occurred when the Communist Party of the Soviet Union began to loosen its controls over economy and society. The rapid spread of plundering of state assets by party and government officials resembled a bank run.73 Periods of stagnant or falling incomes pose a threat to Putin’s public support and therefore to his hold on power. An act of aggression couched as a war of defense therefore serves Putin politically by rallying public support. This pattern, reinforced by extremely tight media control, helps explain the high level of public support for the war in Ukraine.74 Putin’s reputation for competence, energy, and decisiveness contrasted sharply with public perceptions of the hardships of the 1990s. Moreover, apart from the decline in living standards for the greater part of the population until

 



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the late 1990s, most people internalized the loss of the Soviet Union and loss of Russia’s status as a superpower as a humiliation. Together with the personal losses people suffered—​loss of security, loss of status—​a deep demoralization affected society. Russians paid a heavy price for transition as inflation soared and wages and public transfer payments lagged far behind prices. Most Russians faced acute insecurity. Psychosocial stresses, of the kinds we have detailed as consequences of the loss of status and security from liberalization in the United States, took a far heavier toll in Russia.75 “Deaths of despair,” especially among working age men, were endemic. Mortality rates soared. Life expectancy for males in Russia fell to a level comparable with poor and developing countries. The State Statistics Committee estimated in 1999 that life expectancy at birth for males was 58 and for females 71, a remarkable (and, by international standards, extraordinarily high) difference, generally attributed to the higher rates of abuse of alcohol (including alcohol-​related accidents and suicides) and tobacco among men. Demographers warned that at the current rate of mortality, 40% of Russia’s 16-​year-​old boys would not reach their 60th birthday.76 Throughout the 1990s, Russia’s population shrank on average by nearly 780,000 people per year due to the excess of deaths over births. By early 2000, there were twice as many deaths per year as births.77 One reason for the declining birthrate was the high rate of abortions. According to Russian Health Ministry figures, some 70% of pregnancies ended in abortion.78 After that catastrophic decade, public health and life expectancy began improving again the early 2000s, owing to several factors, among them the restoration of political order under Putin and the increase in world oil prices that drove economic expansion. Putin’s standing among the public benefited substantially from association with Russia’s economic recovery and from his claims of Russia’s great-​ power status in the world. Asserting his power immediately, Putin also shifted the balance of power between the state and the oligarchs back sharply to the state. In late July 2000, he met with several of the most prominent heads of private and state-​owned enterprises. He laid down new rules for the relationship between the state and business.79 He promised security of property rights, regardless of the means by which the owners had acquired their holdings, so long as they did not interfere with policymaking in strategic domains and invested their profits in Russia. Most of the oligarchs chose to play by the new rules, but a few refused. Among these was Berezovsky himself, who had played a crucial behind-​the-​ scenes role in arranging for Putin to become president and apparently felt he could defy him.80 Putin initiated criminal proceedings against Berezovsky and another prominent oligarch, forcing them both into exile.81 Then in 2003 Putin began the series of maneuvers that culminated in the arrest and incarceration of

 

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Mikhail Khodorkovsky and the absorption of the major assets of the Yukos oil company into the state-​owned firm, Rosneft’.82 Putin also forced the oligarchs to join the Russian Union of Industrialists and Entrepreneurs (RUIE), the most influential business association in the country. As the then-​head of the association explained, “The interests of the oligarchs are too diverse to create their own public association, and the RUIE can help them conducted civilized lobbying.”83 After Khodorkovsky’s arrest, the RUIE confined itself to mild expressions of dismay. Putin demonstratively refused to meet with the RUIE for almost a year, and when he did finally meet with its board, the subject of the Yukos affair was off the agenda.84 Putin has therefore put the relationship between the state and corporations on a new footing, allowing some private and public tycoons to flourish but requiring them to accept a subordinate role. Although some of the 1990s-​era tycoons have remained powerful and wealthy in the Putin era, Putin has also given figures from the military and security services opportunities to acquire massive wealth, in some cases by driving other businesses into bankruptcy and taking over their assets. He has also thrown lucrative state contracts to associates from his time in city government in St. Petersburg in the early 1990s.85 The small circle of individuals tied closely to Putin through the “Ozero” dacha cooperative, for example, has profited handsomely from the connection.86 The Putin-​era tycoons no longer include many entrepreneurs. A much larger percentage of them are the managers of state companies or owners of ostensibly private daughter firms of state companies. Their compensation packages enable them to amass wealth, at least half of it sent offshore.87 As the Panama Papers revealed, much Russian-​owned offshore wealth belongs to holding companies whose ultimate owners are close associates of President Putin. An example is the cellist Sergei Roldugin, whose offshore accounts received more than $2 billion from companies controlled by other oligarchs and the state.88 As in other countries where closely held business groups control large parts of the economy through the concentration of corporate control, facilitating close connections with government, in Russia dominant companies with market power enjoy a symbiotic relationship with those in power.89 The case of Russia shows that by itself, the existence of a system of property rights is not sufficient to prevent collusive alliances between rent-​seeking firms and politicians or to dissipate the rents that generate income inequality. As in other countries with extreme inequality and collusive relations between wealth and power, large firms enjoy sufficient power to be able to raise barriers to entry in their markets by manipulating their political connections. It is not the form of ownership, therefore, but the anticompetitive impulse of market-​dominating firms that blocks pursuit of a growth strategy that would build incomes broadly and create a sturdy middle class.

 



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7.4.  Competition, Concentration, and Rents The reformers recognized the threat of monopoly power on the part of the big privatized state enterprises. The USSR parliament passed an antimonopoly law in 1990, and in March 1991 the Russian Supreme Soviet passed its own antimonopoly law modeled on equivalent legislation in the European Community. It enumerated a number of practices antithetical to competition and specified penalties for abusive behavior by dominant firms.90 It created a state committee to monitor competition and impose sanctions on dominant firms abusing their market power, and a network of some 80 regional branch antimonopoly committees. But the reformers were also concerned lest the regulators grow overzealous. President Yeltsin decreed in 1992 that the central staff of this body could not exceed 350 employees, and the regional agencies 2,500 employees.91 The antimonopoly body was reorganized several times but since 2004 has existed as the Federal Antimonopoly Service.92 The movement toward a more competitive economy was strangled in its cradle. It was rational for state enterprises that did not have immediate ways of generating profits from the liberalization of commerce to respond by lobbying for cheap bank credits, subsidies, and procurement orders to maintain production. Their pressure forced President Yeltsin to make significant concessions. In May 1992 he appointed the former minister of oil and gas, Victor Chernomyrdin, to the position of acting prime minister, effectively supplanting Egor Gaidar as the architect of reform. In December 1992, Chernomyrdin was named prime minister in his own right. One of his first actions was to provide 200 billion rubles of cheap credits to enterprises in the energy sector.93 Chernomyrdin was no Stalinist. He was a classic representative of the early-​w inner alliance of state enterprises and government that benefited from locking in the gains of initial liberalization. Those controlling large enterprises were able to siphon off high returns for themselves while shifting the losses to the state. Privatization did break up some former state monopolies. The oil sector; the airline industry; agriculture; some machine-​building branches such as automobiles; banking; many consumer goods industries; construction; and retail commerce were subjected to competitive forces through privatization and market reform. Several industries were reorganized into large holding companies, seven of them in the case of the oil industry.94 However, the state retained ownership of sectors deemed strategically important, including electric power, transportation, telecommunications, and much of the machine-​building sector, where the state in some cases created giant holding companies similar to trusts.95 Gazprom formed in 1989 as a giant commercial enterprise based on the former Soviet gas ministry. Viktor Chernomyrdin, formerly minister of oil

 

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and gas, became the company’s first chairman. In contrast to the oil industry, Gazprom retained its monopoly under reform, although some blocs of shares were sold on the market.96 Russia’s privatization resulted in a higher level of concentration of ownership and control in Russian industry. Two economists traced the ownership of 64 major private companies at the beginning of the 2000s and found that 85% of their capital was controlled by eight business groups. The total sales revenues of the top 12 privatized companies was roughly equal to the entire revenues of the federal government.97 Two Russian economists estimated that as of the summer of 2003, some 19 oligarchs controlled 40% of the big firms in their sample.98 Moreover, owners tended to hold extremely large blocks of shares. The average control stake for the largest private firm was about 80%.99 The high level of industry concentration did not result from the loans-​for-​shares scheme alone; other entrepreneurs built up sizable holdings through the accumulation of privatization vouchers or through skillful investment. Still other major owners acquired private stakes in state-​owned corporations, such as Gazprom, or stripped assets from them. The last minister of the oil industry in the USSR government became the president of a privatized oil company, Lukoil, whose assets included some of the most profitable fields in Russia; he acquired 10.4% of the shares in the company.100 Reformers argued that the owners of these concentrated holdings were responding to an environment in which property rights were insecure, and that once they had acquired sufficient control to guarantee an adequate return on their assets, they would have an incentive to shift toward more productive strategies and to support the rule of law.101 This hope proved to be ill founded. Except for a brief phase in 1999–​2002, when a few large private corporations did begin restructuring their firms with a view to maximizing long-​term asset value, private owners instead tended to prefer asset-​stripping to investment and modernization. Empirical studies showed that the more concentrated the ownership of a firm, the lower its productivity and performance.102 This held both for state-​owned and private enterprises. Rather than investing in costly and risky modernization and restructuring, both privately and state-​owned firms instead diverted a portion of their profits into seeking protection from competition. Privatization did not lead Russia into a thriving market economy, where profitability arose from productivity rather than from political cronyism. In contrast to the priority they gave to privatization, both the Russian reformers and their Western advisers regarded the promotion of competition and antimonopoly regulation as of second-​order importance. Moreover, recognizing the market power of giant enterprises, they exempted many sectors of the economy from antimonopoly regulation. President Yeltsin’s 1992 decree calling for specialized privatization procedures for enterprises serving the

 



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national interest—​telecommunications; rail, air, sea, and river transportation; engineering; R & D; specialized construction; wholesale trade for state procurement; electric power; oil and gas; precious metals and gems; all defense-​related industries; spirits; and all enterprises with over 200 employees—​effectively preserved monopoly and oligopoly in some of the major branches of the economy.103 Moreover, the bulk of the activity of the antimonopoly agency and its regional branches was drawing up lists of enterprises with monopoly power. A firm was deemed to possess a monopoly if it had at least 35% of the relevant market for its products. Product markets were defined narrowly, so that as a result of the paucity of small and medium-​sized firms, a large number of firms were listed as monopolies. At one point, five bread-​baking plants in Yaroslavl’ were all listed as monopolies.104 Eliminating most price controls in a heavily monopolized economy suffering from severe shortages of consumer goods brought about a sharp and severe price inflation. The reflexive response by the Russian authorities to regulating monopolies was—​and remains—​to reimpose price controls rather than to demand more competition. By August 1993, some 7,000 enterprises were listed on regional or federal registries. The antimonopoly agencies set blanket rules on price margins, but firms found it easy to evade these limits.105 Moreover, the substantial dependence of regional and local governments on major local firms for employment and public services discouraged local authorities from enforcing antimonopoly rules.106 From the start, therefore, the Russian approach to monopoly power was not to encourage competition by breaking up enterprises or creating conditions conducive to competition, but to revert to Soviet-​style price controls. The consistent priority given to privatization over competition meant that the large state-​owned monopolies became privately held monopolies.107 The power of competition to induce efficiency and innovation, and to restrain rent-​seeking, was thwarted from the very beginning as a result of a single-​minded focus on privatization. Not surprisingly, therefore, profitability was driven not by increases in productivity, but by the power of firms, both private and public, to extract rents. As in the United States, rising concentration has reduced competition. As the head of the Federal Antimonopoly Service (FAS) observed, the decline of competition in many sectors is “due to the stratification of the economy and the creation of state-​monopoly capitalism, and the interweaving [srashchivanie] of business and the state.”108 However, FAS has not in fact worked to increase competition or to reduce market domination. Even though its powers were expanded in 2006 and again in 2012, its focus shifted away from overseeing mergers and acquisitions and toward preventing firms from abusing their market domination by raising prices and preventing collusive agreements among firms. As a result, the number of cases pursued by the FAS has increased, but its remedies almost

 

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always are to block proposed price increases.109 FAS also has worked to protect Russia’s domestic market from foreign competition. But it has not checked the growth of concentration in markets nor the swallowing up of public and private firms by state firms. Therefore the level of concentration has only increased since the early 1990s. Some consumer goods branches have seen decreased concentration (e.g., distilled spirits) while others have become highly concentrated (production of musical instruments is now entirely concentrated in three firms). In many branches of heavy industry, concentration has soared. In the production of steel pipes, the four biggest firms had 54% of market share in 1991; today it is around 95%. For firms producing turbines, top four’s share rose from 53% to over 90%. There are similar levels of concentration in iron ore production, paper and cardboard, oil extraction, and pharmaceuticals.110 Natural gas and bauxite mining are largely single-​company monopolies.111 Agricultural production has also become heavily concentrated. Overall, the top 22 agro-​holding companies own about 8% of all arable land. In some regions, concentration is much greater and is encouraged by the regional authorities.112 High concentration of production facilitates state control over the economy and regime access to rents. One of the largest of the state holding companies is Rostekh (Rostekhnologii), which Putin created by decree in 2007. The official purpose of the company is to concentrate all of Russia’s productive capacities in high-​technology manufacturing, particularly defense, aviation, electronics, and automotive branches. The company began with 443 enterprises and since then has acquired another several hundred companies organized into 15 holding companies and employing around 500,000 workers. Some of the companies it has acquired were in difficult straits (such as AvtoVAZ in Togliatti) and had to be restructured; others were state-​monopoly enterprises all along. Rostekh’s size and importance to the economy protect it from competitive pressures. Its CEO, Sergei Chemezov, is a former lieutenant general in the FSB. Chemezov served with Putin in the KGB in Germany and is a member of the political bureau of United Russia, and the chairman of the Association of Mechanical Engineers of Russia.113 It was Chemezov who devised the model of the giant state holding company and proposed Rostekh’s formation to Putin.114 Another mainstay of state political power is Gazprom, which employs around a half million people and maintains monopolies in several areas, particularly natural gas transport. Like other state monopolies in Russia and China, its goal is not to maximize efficiency, but to fulfill a number of political objectives for the state and its leaders. Gazprom’s privileged position makes it highly profitable despite being badly run. An analysis by the Russian investment firm Troika Dialog estimated that 70% of Gazprom’s capital investment in 2011 ($37 billion) was “value-​destroying,” particularly investment in production and transportation

 



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capacity. These projects generate enormous profits for the owners of the construction companies, who in turn happen to be among Putin’s closest associates.115 The giant oil and gas companies, public and private, also benefit from the fact that they shift the cost of environmental damage to the public. When massive oil spills and other disasters occur, civil and criminal penalties, in the rare cases even when they are assessed, are nominal.116 The high profits of market-​dominating firms in the private and public sectors allow them to pay extremely high wages to their top executives. Taking the average reported compensation of CEOs of top-​50 private firms in Russia as the baseline, a top-​50 CEO’s pay is approximately 800 times the average starting wage of a skilled worker in industry in the Urals and 500 times the average wage in the economy. Data on the compensation of CEOs in Russia show that, comparing companies of similar capital asset value, Russian CEOs compare favorably to their American and British counterparts. One recent study found that the general directors in Russia’s 50 largest private-​sector firms received an average of 233 million rubles per year, or more than $3 million. This included base pay as well as bonuses and other forms of incentive pay (which can often be as great as or greater than base salary).117 Although regular workers also are entitled to bonuses and other forms of incentive pay, those of top executives are far higher than those paid to workers, further widening intraindustry pay gaps. Likewise, market-​dominating state monopolies such as Gazprom, Rosneft’, and other SOEs also provide extremely high compensation packages to their senior managers and board members—​equivalent in some cases to those of private companies. The CEOs at the top state firms receive at least as much as their private sector peers. Anders Åslund reports that the CEO of Gazprom, Aleksei Miller, receives a salary of $25 million in addition to a number of other benefits.118 A British study of executive compensation packages in 2014 found that managers who served on the board of directors at Gazprom received, on average, 249 million rubles per year. Most of this compensation comes from membership on the boards of the firm’s daughter companies.119 Other major energy firms, such as Rosneft’, award similarly high compensation packages to their board members and top managers. RBK estimated that Igor Sechin’s total compensation in 2015 was somewhere between 459 and 612 million rubles, of which only 180–​240 million was base salary (i.e., perhaps $3 million in base pay and another $3–​4 million in bonuses). Likewise the 10 members of the Rosneft’ board received on average 370 million rubles in 2015, of which 70 million was base salary. At a shareholder meeting in June 2016, Sechin defended this level of compensation on the grounds that “the scale of income of our top managers corresponds to the level of large Russian companies and must be comparable to the level of world companies. Otherwise we will face an outflow of qualified cadres.”120

 

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The pattern of close relations between top executives and those in power applies to levels of government lower down as well, at the regional and municipal levels. Again, the relationship comprises an element of mutual dependence and reciprocal benefit. In many regions and cities, major firms—​whether public or private—​work under a system of informal rules in which it is understood that they will support those in power in return for favorable treatment in matters concerning taxes, employment relations, health and safety, environmental regulation, and the like. Chief executives are expected to help them obtain investment and procurement contracts, and in return they are expected to contribute to the executives’ election campaign funds. Everywhere it is the voice of big business that dominates. The promotion of competition takes a back seat to protecting the social and political interests of the region.121 Press reports occasionally unearth instances of the pervasive cronyism tying those in power with those generating economic rents. An example is the Center for Promising Technologies (TsRPT, for its Russian initials). This is a public-​ private partnership established in 2017 by a group of tycoons and companies close to the Putin administration. The government gave it a monopoly on the right to assign digital labels on all medical and tobacco products as a way to prevent counterfeiting and tax evasion. As of July 1, 2020, a subsidiary of the company, called TsRPT-​Operator, was given the exclusive right to provide a mandatory unique digital label to every package of medicine at each point in the chain of transactions: from the producer to the distributor, the distributor to the pharmacy, and the pharmacy to the customer. At each step, the seller must apply for a digital code and pay a 50-​kopeck fee. The system has experienced frequent delays at each stage of the chain, resulting in several cases of long holdups in the supply of essential anti-​Covid therapeutics. However, the system has generated huge rents for the owners of the company since around 5 billion packages of medicine are sold each year.122 In Russia, liberalization and privatization were compromised from the start by corruption, cronyism, and a systematic alliance of large corporations with the rulers of the state. All of these have expanded under President Putin. Because the way in which market reform was carried out facilitated massive rent-​ appropriation and the sharing of rents with those running the government, it has contributed both to the deepening of economic inequality and to authoritarian rule. Contrary to the expectations of the reformers inside Russia and its Western advisers, the actual transition in Russia was shaped by the inherited structure of power and wealth in society. The Russian reformers and their Western advisers were guided by the famous theorem proposed by Ronald Coase, discussed in Chapter 3. Coase held that if the costs of economic transactions are sufficiently low, then regardless of how property rights over some set of economic assets are initially allocated,

 



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bargaining and contracting among owners will eventually result in an optimally efficient distribution of ownership and control rights over those assets. But note the if. The theorem stipulates that the distribution of property rights reaches optimum efficiency if the costs of reaching agreements are low. In fact, in any real society, the costs of transactions—​the difficulties of bargaining, acquiring accurate information about the qualities of what is being sold, and enforcing an agreement after it has been reached—​can be formidable.123 In Russia, the uncertainty surrounding the change in economic and political conditions made markets extremely hazardous and inefficient. Owners of many firms preferred to capitalize on their political leverage and take advantage of inefficiency rather than to restructure.124 The dominant pattern of privatization in Russia was acquisition of title through insider connections, rather than through open competitive bidding. Moreover, the privatization program contributed little to the urgent task of modernization and retooling of the economy. Voucher privatization was intended as a political impetus to a process that would end in the consolidation of a market economy. The policymakers believed that mass privatization would establish an interest on the part of new property owners in increasing the value of their assets, which they would achieve by investing in the modernization and retooling of the firms. In turn, the need for capital would induce a healthy capital market into being. However, the lack of an honest and competent institutional infrastructure for market exchange undermined confidence in the future and deterred entrepreneurs from investing capital. The result has been massive capital flight out of Russia. It is estimated that over half of privately owned wealth in Russia is held in offshore accounts, a far higher share than for any other country in the world.125 Many of the owners of that wealth are cronies of President Putin, as the Panama Papers have revealed, tied to the president by mutual vulnerability and deep corruption.126 The rent-​extractive structure of the Russian political economy contributes to income inequality, cronyism, corruption, and enormous waste of productive resources. Among other things, it perpetuates the economy’s dependence on natural resource exploitation for economic rents. The World Bank estimates that while human capital—​the net present value of projected future earnings of the labor force—​represents close to half of Russia’s total productive wealth, that human capital is extraordinarily unproductive. Despite Russia’s high level of formal educational attainment, returns to education are far below those of the OECD countries: 5.4% as compared with the global average of 15% and the European Union average of 10%.127 Russia’s heavy reliance on mineral resources and low levels of productivity of labor and capital underline the fact that Russia’s economy has failed to build an institutional environment where owners, managers, and workers jointly invest

 

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in and share the benefits of knowledge and skill as a productive asset. The alliance of wealth and power in Russia has sustained itself through rent extraction, less by suppressing labor than by co-​opting it in traditional corporate patrimonial labor relations. The result, as in the United States, is to allow owners in the private sector and top managers in the state sector to exclude labor from benefiting from realizing the potential of Russia’s human capital reserves. In this system, both wages and productivity remain low, while the returns from the exploitation of natural resources raise incomes at the top and sustain the oligarchic alliance of wealth and power. Meantime, the concentration of income and wealth at the very top continues. During the pandemic year of 2020, as real incomes for most the population stagnated, the market for luxury goods realized huge profits. In part aided by the government’s program of subsidized mortgage loans, the sale of top-​tier apartments in Moscow reached a six-​year record. The Moscow Rolls-​Royce dealership sold a record number of new cars for the second year in a row, and top consumer luxury brands such as Prada, Christian Dior, Tiffany, and Bulgari all enjoyed higher profits in 2020 than in 2019.128

7.5.  Return to the Mobilization Regime The invasion of Ukraine gave Putin an opportunity to eliminate the few surviving institutional legacies of the democratization of the 1990s.129 Over the decade from 2012 to 2022, Putin’s regime had steadily increased repression of independent sources of organization and information, but the start of the war let Putin shut them down entirely. This phase began in 2012 following a surprisingly large-​scale wave of public protests against fraud and manipulation in the Duma election of December 2011 and the transparently contrived scheme to allow Putin to return to the presidency in the election of March 2012. Invading Ukraine culminated the process. The participants in the 2011–​12 protests were widely characterized as “middle class” because they were predominantly from educated and economically comfortable strata.130 This outpouring of opposition sentiment evidently shocked Putin, who in recent years had placed—​rhetorically at least—​a bet on the middle class as a source of support for the regime. Putin had made several public statements denouncing the high level of inequality in the country and calling for policies that would build up a strong middle class. In an address on February 8, 2008, Putin declared that the current level of income inequality (referring to the 15-​fold gap between the highest and lowest income deciles) was “absolutely unacceptable” and called for measures that would raise the share of the middle

 



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class in society to as high as 60% or even 70% by 2020.131 Shortly before his return to the presidency in 2012, Putin characterized the current level of income inequality in Russia as “unacceptable, outrageously high” in a pre-​election article in February 2012, and repeated the point in a speech to the State Council in July 2012.132 A major report by policy experts for the Russian government in 2012 argued that inequality’s growth was creating growing social dissatisfaction and blocking upward mobility. Rather than expanding in size, it claimed, the middle class had grown richer.133 In the period roughly between 2008 and 2011, Putin, Prime Minister Medvedev, and others praised the virtues associated with middle-​class values—​ a good work ethic, the habit of saving and investing for the future, modesty in consumption, an orientation toward stability. They expressed little fear that an independent middle class might demand democratic rights, and instead painted the middle class as a conservative force, a source of support and stability for the regime. The head of the United Russia party declared that his party “prefers social conservatism, relying on the middle class and acting in the interests of this class, defending the interests of those who need no revolutions, either financial, economic, cultural, political or orange, brown, red, or blue.”134 When the economic recession struck in 2009, the regime declared that its policy was to rescue members of the middle class and put them back on their feet. But the scale of the 2011–​12 protests seems to have led Putin to conclude that the middle class was ungrateful. In any case, Putin’s political strategy began to shift as he turned to a course of steadily increasing political repression and conformity. Gone were any nods to economic modernization or political democratization or the value of a strong middle class. In their place came a steady flow of laws and decrees eliminating any possibility for independent, let alone oppositional, political organization. The scope of legal organized political expression grew narrower and narrower, and repression against opposition forces intensified. Putin passed expansive legislation justifying the suppression of media organizations on grounds of “extremism.” Legislation requiring nonprofit organizations if they had international ties to register as “foreign agents” forced many to close. To the extent that Putin paid attention to income distribution, it was only in reference to poverty. Putin has sought to strengthen the social safety net and raise lower-​end incomes, rather than taking more direct steps to reduce inequality. This has continued through 2021, when his annual message to parliament again called on the government to raise incomes overall and to give the reduction of poverty particular priority. Putin noted that the Covid-​19 pandemic had exacerbated the problems of social inequality in Russia, as in other countries as well. He declared that the government’s main focus must be on raising incomes for the population overall and reducing poverty, particularly for

 

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single-​parent families.135 Fighting poverty rather than inequality allowed Putin to ignore the inconvenient facts of extremely high income and wealth at the top, which, had Putin chosen to acknowledge them, would have required him to recognize the oligarchic bargain that his regime rests on. The Ukraine war—​beginning with the annexation of Crimea in 2014, continuing with support for the military operations by pro-​Russia separatists in the two eastern oblasts of Luhansk and Donetsk, and most recently culminating in the full-​scale invasion of Ukraine—​gave Putin an ideal justification for moving toward full-​scale authoritarian rule. Propaganda has fostered the line that Russia is fighting for its survival against the West, and has forced public figures such as university rectors to sign statements in full support of the war. Publicly referring to the war as a war rather than a “special military operation” was made a criminal offense. Putin has increasingly moved figures associated with the military-​ security elite into positions of responsibility and given the security forces wide discretion to arrest liberal-​minded intellectuals. Putin was reluctant to declare a full-​scale mobilization of all human and material resources, such as occurred during the civil war, the first five-​year plans, and World War II, although in September 2022 he declared a “partial mobilization” following significant advances by Ukraine forces. A mobilization regime is a type of regime that turns civil society into a resource for state power for waging war or serving a cause of equivalent urgency. It centralizes power in the state and its leader and promotes an ideology of national unity and purpose.136 A mobilization regime fosters a public atmosphere of crisis and emergency, demanding that society devote its utmost energies to building a bright future or defeating a common enemy. Standing institutional rules and procedures are abandoned in favor of national unity and cohesion to serve a transcendent national cause. Russia under Putin has adopted some features of a mobilization regime. Especially since the start of the invasion in February 2022, the regime has promoted an ideology emphasizing total devotion to the state. Schools have been required to adopt a new curriculum with a heavy dose of propaganda.137 All independent media outlets have been shut down and a number of formerly tolerated liberals have been arrested. Many more have fled the country. The official line is that Russia is fighting a long-​deferred, necessary war of defense against an aggressive (but degenerate) West to save Russian soil and civilization.138 The emerging blend of Orthodoxy, patriarchy, autocracy, imperialism, and Eurasianism in regime propaganda usefully distracts attention from inequality and justifies the centralization of power. Putin’s regime illustrates the point Barrington Moore made about fascism—​that it is “an attempt to make reaction and conservatism popular and plebian.”139 As Timothy Snyder puts it, Putin’s team is diverting

 



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attention from the extreme inequality of the society “by changing the subject from prosperity to values, to what Putin called ‘civilization.’ . . . When the subject is inequality, change it to sexuality.”140 Putin and his entourage have also promoted circulating fantasies about Western plots against Russia, such as the legend of the “golden billion.” (The “golden billion” refers to the idea that Western elites need to colonize Russia in order to preserve sufficient resources to maintain a high standard of living for the West.)141 Like the Far Right in the United States, Putin inveighs against liberals and “globalists” and their nefarious schemes. Fanning the sense of national grievance, diverting attention away from low living standards at home, corruption, and extreme inequality, the war in Ukraine creates the ideological basis for a creeping mobilization of society. A mobilization regime centralizes control over the allocation of resources, regardless of whether property is nominally private or not. It also detaches the economy from foreign trade and investment. In this respect, the centralized German economy of the Third Reich and the state socialist economy of the Soviet Union had similar features.142 In Russia’s case, while Putin has not declared all-​ out military mobilization, perhaps fearing the consequences of acknowledging that the “special military operation” in Ukraine requires devoting Russian effort on a larger scale than initially expected, he has begun nationalizing enterprises, such as a joint venture for gas exploration in the Pacific, and enacting legislation that requires that enterprises accept defense contracts and require their workers to put in overtime hours on demand. Putin has exploited familiar themes articulated by generations of antiliberal Russian thinkers to justify his moves over the past decade. Putin and his entourage have combined elements of the Orthodox Christian–​fascist vision of the Russian philosopher Ivan Ilyin with ideas from the most radically antidemocratic adherents of “Eurasianism.”143 He has struck chords that have long historical resonances, such as the idea that “holy Russia” is defending fundamental moral values against the false and decadent lures of Western materialism; the notion that Russia’s destiny does not lie in integration with a world capitalist order; that the West is in a condition of terminal decline, and unalterably hostile to a resurgent Russia; and that there is no such thing as the nation of Ukraine since Ukraine belongs to Russian Orthodox civilization. Whether or not Putin believes any of these ideas, he has deployed them tactically in order to shape a regime with many of the features of totalitarianism. The extreme inequality of Russian society, which necessarily means that there is a thin, insecure, and state-​dependent middle class and a small stratum of ultrawealthy oligarchs who feed the state with resources and in return are allowed to lead extravagant lives of luxury, is a permissive condition for Putin’s strategy even if it does not require

 

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them. So is the feeling of national humiliation from the loss of empire and great-​ power status and the dislocations and insecurity experienced by many people following the transition from the Soviet planned economy. These blows, both material and moral, have also helped to enable Putin’s steady turn away from democracy. Over the 30 years of post-​Soviet Russian history, the alliance of early winners with the politicians wielding state power has grown increasingly closed. It has blocked opportunities for entrepreneurial investment, restricted market competition so as to benefit those businesses enjoying a privileged relationship with those in power, and eliminated any possibility to organize political opposition. The well-​founded fear that an open arena for political and economic competition would threaten the sources of rents for the wealthy and the powerful locks them in a sustained embrace. Although the concentration of market and political power has produced extraordinary accumulations of wealth at the top, very little of it has been plowed back into raising the productive capacity of the country or expanding the provision of public goods. Rather, the greatest part of the wealth amassed by Russian tycoons and state officials has flowed into assets overseas. Russia’s case is extreme but nonetheless instructive: it shows how a model of economic liberalization that ignores the importance of broad-​based growth or service to the public good creates a political logic antithetical to democracy. The corrupting influence of Russia’s oligarchs is not confined to Russia. They have helped finance Russia’s overseas influence and subversion operations, with Donald Trump their greatest prize. Many of Trump’s real estate ventures were financed by Russians, and some of his closest advisers were on the payroll of Russian oligarchs.144 Deutsche Bank in New York, which for many years was used by Russian oligarchs and organized crime leaders to launder their money, also backed Donald Trump when other New York banks refused to lend to him.145 One oligarch with strong ties to Putin, Evgenii Prigozhin, has made a fortune by obtaining exclusive state procurement contracts. For example, companies owned by Prigozhin have a near-​monopoly on supplying school meals in Moscow, which they have used to extract high profits. One explanation for their profitability is suggested by the fact that his companies have been fined repeatedly for serving children spoiled food.146 Prigozhin has also played a major role in foreign policy. The United States has indicted him for helping finance the operation to subvert the 2016 election. He also finances a mercenary army called the Wagner Group that conducts armed operations around the world and has been active in the war in Ukraine, to the point of recruiting men for his army from Russian prisons and boasting of the effectiveness of his fighting force.147 Russian oligarchs provide a major source of the funds held in offshore accounts, as the investigations based on the Pandora Papers and Paradise Papers detailed.148 Russian oligarchs have also contributed to the loosening of banking

 



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regulations in American states such as Wyoming in order to enable them to set up private trust companies that are fully shielded from oversight.149 Russia’s case is extreme, but the forces that have produced the extraordinarily high inequality and authoritarianism in Russia are at work in America as well. As Fiona Hill put it, “Russia is America’s Ghost of Christmas Future, a harbinger of things to come if we can’t adjust course and heal our political polarization.”150

 

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Market Transition and Inequality in China

8.1.  Rents and the Dual Economy 8.1.1.  Liberalization China’s reforms are often contrasted to Russia’s. Whereas China’s reforms are considered incremental and gradual, Russia’s are regarded as radical and abrupt.1 Often the two countries’ policies are treated as choices of economic strategy rather than ad hoc responses to circumstance.2 This is not entirely the case, however. It would be more accurate to say that China’s reforms were piecemeal and adaptive than to see them as part of a grand strategic design, and that Russia’s programs of stabilization and privatization were always partial and aspirational more than comprehensive.3 The actual differences were more a matter of degree than of kind. And most recently, both regimes have become hostile to any significant movement in the direction of democratization. For that reason, China’s evolution over the last 40 years also bears lessons relevant to the United States. At the start of liberalization, Russia’s economy was far more centralized and its industrial sector much larger than China’s. China’s reforms proceeded with far more regional variation than did Russia’s and began from a different developmental starting point.4 China’s prereform economy rested much less than Russia’s on central planning of production and allocation. Therefore, in China, regional authorities have exerted more influence over the formulation and execution of policy than in Russia, although Xi Jinping has made a concerted effort to replace decentralization with centralized policymaking power.5 China’s leaders called China’s market liberalization “reform and opening up.” Reform referred to a partial opening of production and consumption to market forces, while opening up referred to allowing foreign companies to The Returns to Power. Thomas F. Remington, Oxford University Press. © Oxford University Press 2023. DOI: 10.1093/​oso/​9780197685952.003.0008

 



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enter as investors and producers. The process began in the late 1970s when the government legalized household farm production for market sales in the most hunger-​stricken regions—​a policy that made legal practices that had already begun informally out of desperation.6 Soon afterward, many light industrial manufacturing and processing facilities that had been created on rural communes as part of the Great Leap Forward became publicly owned commercial entities organized as township and village enterprises. These took off quickly in the early 1980s, generating disposable income for agricultural workers. As they grew, they began to compete with state-​sector enterprises in many industries, particularly light industry and services.7 The great pent-​up demand for consumer goods enabled them to reap profits quickly, although as their numbers grew, they became less profitable.8 Nonetheless, the competitive threat they posed to state enterprises alarmed conservatives. As in Russia, the reform leaders had to balance the objective of stimulating economic growth and modernization with the political imperative of retaining power in the face of strong resistance. Throughout the 1980s and later, a dispute between conservatives favoring state domination of the economy and reformers advocating greater liberalization ran without ever being finally resolved. Although the objective of the reformers was to encourage entry onto the market by new private firms, and to force state firms to compete with private firms, dissipating rents through competition, the reformers never had sufficient political clout to drive through reforms that would have forced the state firms to face a fully competitive market. For example, comprehensive price liberalization was never attempted, and the short-​lived system of “tax for profits” was dropped in favor of the profit-​contracting system that allowed enterprises to negotiate on the level of retained profits.9 These were frankly acknowledged as politically necessary concessions that engaged the support of state-​owned enterprise (SOE) managers for a market-​oriented economy that allowed them to pursue profit but also guaranteed them protection from failure. The managers of state firms sought the kinds of reforms that would give them greater discretion and more access to state financing, but they did not want to accept more risk.10 As a result, economic reform to this day has tolerated practices of ad hoc bargaining between large SOEs and the regime, rather than a system in which a fixed set of tax and interest rates and market prices would have constrained managers’ choices. From the beginning of the reforms, particularistic relations between enterprises and governments generated rents that were shared with the enterprises’ political allies. The government divided the economy between a protected and politically powerful state industrial sector and a private sector facing much higher levels of competition.

 

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One reason that market reform in China was piecemeal was that Deng Xiaoping’s political power was challenged at every turn. The political environment through the late 1970s was still strongly influenced by the Maoist faction.11 Deng could only initiate market reform in sectors where bureaucratic and political resistance was lower. Accordingly, rather than to seek decisive victory in the intraparty battle between reformers and conservatives, Deng treated limited policy reforms as experiments rather than as a major policy turn.12 In 1988, when the conservative wing of the party blocked Deng and Zhao Ziyang, Deng’s successor as general secretary, from pushing through comprehensive price reform that would have required all enterprises, state and private, to compete on a level playing field, Deng and Zhao retreated and accepted instead a dual-​economy model in which plan and market sectors operated side by side.13 After the violent suppression of the Tiananmen Square protests in 1989, the pro-​market faction’s influence waned, and only with his 1992 “Southern Tour” was Deng Xiaoping able to rally the forces favoring market reform—​but at the cost of abandoning all support for political reform, granting the military wide rights to spin off state businesses into private and semiprivate commercial companies, and continuing to subsidize large state enterprises.14 Deng even encouraged party officials to “jump into the sea” and become entrepreneurs themselves.15 He famously encouraged the party to tolerate a certain amount of inequality, as growth favored top-​end incomes: “Let some get rich first,” he declared (rang yibufen ren xian fu qilai). The assumption of course was that the rest would follow soon enough. However, intraparty factional conflict over the extent of permissible market activity continued.16 As profiteering and corruption grew, the party tightened controls over party and government officials’ business activities. However, the party resumed the course of pressing forward with expansion of the market sector in the late 1990s, when premier Zhu Rongji and party secretary Jiang Zemin adopted a policy of “Grasp the big, let go of the small.” This meant privatizing some state enterprises, substantially downsizing others, and concentrating support for the most important state enterprises. Thus throughout the reform era and still today, the party’s encouragement of market competition in the private sector is paralleled by protection of the state sector.17 This protection has encouraged massive asset-​stripping as managers formed profitable subsidiaries through self-​dealing.18 And, as in Russia, the SOEs spend heavily to maintain their close ties to political leaders.19 The fact that, as in Russia, SOEs dominate sectors of strategic importance for foreign and national security policy strengthens their policy influence.20 In some cases, China’s SOEs are strong enough to ignore policies that interfere with their practices.21 China pursued its own version of shock therapy in the late 1990s and early 2000s. As many as 50 million workers were laid off, close to 40% of the state

 



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enterprise labor force.22 Under the policy of “Grasp the big, let go of the small,” the state consolidated market power in a relatively small number of large and powerful SOEs. These SOEs were assigned planned procurement targets in return for guarantees of supplies, financing, and orders.23 Recognizing that many of the SOEs are loss-​making, the government continues to encourage mergers of weaker enterprises into larger and more successful ones. This, however, has further reinforced the political power of the SOEs and allowed them latitude to capture monopoly rents. In recent years, their level of indebtedness has risen faster than their profits, leaving them as a sector with negative net working capital.24 Meantime, relatively few of China’s private sector firms have achieved similar scale. The great majority of China’s major firms are state owned. This suggests that the regime encourages private sector to grow but not to grow to the point where competitors would threaten the big state firms.25 Since the high-​water mark of SOE reform, in the late 1990s, Chinese SOEs have been protected from failure.26 China does have an antimonopoly law, but its use is largely confined to limiting foreign firms’ access to the Chinese market rather than to enforcing competition among Chinese firms. Moreover, it is largely inapplicable to the state sector.27 The sectors in which state enterprises are dominant, such as oil and gas, railroads, and telecommunications, are therefore heavily concentrated.28 Because political objectives take precedence over efficiency for Chinese SOEs, experts and policymakers agree that they remain less productive than private sector firms despite decades of government calls to improve their efficiency.29 One estimate is that the return on assets of state-​ owned monopolies is just over half that of private firms.30 They are profitable to the degree that their return reflects the government’s willingness to bail them out when they suffer losses. They serve multiple political purposes: protecting the government’s control over strategically important sectors of the economy; ensuring social welfare and stability; advancing Chinese geopolitical interests overseas; and providing a reliable stream of rent income to top managers and political officials. In the political economy of China’s SOEs, profitability is not a reflection of productivity, but of political influence. Protected from having to compete in the open market, the SOEs merge political with market power.31 Implicit state subsidies to SOEs account for around 1.5% of GDP.32 As with American banks that are deemed too big to fail, these guarantees give them measurable advantages in credit markets over rivals. Particularly since 2007, periodic efforts to force SOEs to become more competitive have foundered.33 As a result, they depend on a continuing stream of state orders and subsidized credit. They enjoy favorable tax regimes and large infusions of capital when needed. They are protected by high barriers to entry, even in services such as banking, insurance, logistics, and telecommunications.34 Therefore, because they serve multiple political purposes, the regime tolerates the low rate of return on assets.

 

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They are crucial sources of support for the regime and its rulers: they help stabilize the economy during downturns by stepping up investment and infrastructure spending; they extend China’s power abroad, for example in the Belt and Road Initiative; and they provide streams of income to their workforces, particularly their managers.35 They still receive about half of total bank credit and possess about 40% of total corporate assets.36 Like the large natural resource SOEs in the Putin regime, SOEs serve as China’s “national champions” and a major source of state revenue.37

8.1.2.  Cronyism, Localism, and Corruption China has had no explicit oligarchic pacts such as those that formed in Russia in 1995–​96 and in 2000. Rather, business-​government relations are governed by tacit understandings. Those large firms that are allowed to grow do so by cultivating networks of personal relationships with top leaders. Cronyism therefore pervades the political system and economy at every level.38 Lucrative opportunities for rent appropriation and rent-​sharing by private businesses have arisen from arbitraging price differences between state assets and market prices, from exploiting crony connections with officials for private profit, and from evading formal controls on private commercial activity.39 Entrepreneurs find ways to meet the personal and political needs of party and state officials, both by demonstrating political loyalty and in more explicit ways, such as putting officials and members of their families on the boards of companies giving their children access to well-​paid jobs.40 A good example is Zhejiang Province, where a number of major companies were started (among them Alibaba). The province has had a policy of favoring entrepreneurship, particularly high-​technology firms. As party secretary there from 2002 to 2007, Xi Jinping continued the policy, but it began well before his time and continued afterward. Close business-​government ties fostered cronyism and corruption. Alibaba’s founder, Jack Ma, was skillful at playing the game. Before his fall from favor, Ma had been adept at forming mutually beneficial personal relations with top leaders at the national level and in Zhejiang. Ma made sure to invite many senior party leaders to become shareholders in the Ant Group through layers of investment holding companies, ensuring that when it went public, they would reap windfall gains. He was close to the former party secretary of Hangzhou City, Zhou Jiangyong, and to province-​level officials in the same province, Zhejiang. When Ma received an honorary medal from the former party secretary of Hangzhou City, Zhou Jiangyong, he himself observed that “the Hangzhou government and Alibaba represent a brand-​ new government-​ business relationship, a kind of family relationship.”41 How close the family relationship was is suggested by a report in a Chinese

 



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newspaper that Zhou’s wife and other relatives had received enormous income from positions overseeing local businesses.42 In late August 2021, Zhou was removed from his position as party secretary and placed under investigation for corruption. However, many of those he benefited belonged to factions that Xi Jinping regards as rivals. Ma also cultivated a good relationship with Li Qiang, who served as head of the Zhijiang provincial government from 2012 to 2016. In 2017, Li became party secretary for Shanghai. Both in Zhejiang and in Shanghai he facilitated Alibaba’s business interests. Among other things, he ensured that Alibaba’s application of an IPO for the Ant Group and a listing on the newly established Shanghai stock exchange won fast approval in late summer 2020. However, soon afterward, China’s financial regulators introduced new, stricter rules on online lending, among which is requiring online and microlenders like Ant to provide at least 30% of the funding (i.e., total loan) when it offers loans with other banks. Shortly afterward, the Shanghai stock exchange suspended Ant’s IPO, prompting the company also to pull out of its listing in Hong Kong. The IPO was expected to have netted $34 billion in sales. The move followed a speech by CEO Jack Ma on October 24 criticizing excessive regulation of the financial industry. Moreover, Ma made the further mistake of boasting of his close personal relationship with Xi.43 Although Xi has relied on some of his former Zhejiang Province colleagues, since becoming party secretary of the Communist Party, he has launched anticorruption proceedings against others, particularly some with close ties to Jack Ma.44 Therefore, although Xi has relied on some former colleagues from Zhejiang as a base of support, he has turned against others, particularly some who are tied to Alibaba and other firms.45 In this way, Xi can—​selectively—​­attack corruption, cronyism, and regional power centers all at the same time.46 The larger point is that the obverse of personalism and cronyism in business-​government relations in a country such as China or Russia, which are mutually beneficial only so long as each side needs the other, is the rapid dissolution of personal ties when the leaders decide to suppress a businessperson who has crossed some red line and arrest the politicians who served as patrons. As a matter of general policy, the party formalized institutional channels for access by businesspeople to party decision-​makers with the adoption of the “three represents” doctrine under Jiang Zemin in 2002.47 This change referred to the party’s recognition that businesspeople were eligible to join the party. Many private entrepreneurs “put on the red hat” by joining the party or registering under its auspices. Many have joined people’s congresses and people’s political consultative conferences at the national and subnational levels. The heads of Tencent Holdings, Alibaba, and over a hundred more of the Chinese tycoons who are listed on the annual Hurun lists are members of the National People’s

 

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Congress.48 At every level, party and government officials have created some organizational channels through which businesses can fund government needs. Local party and government departments maintain “little treasuries,” slush funds formed by kickbacks and bribes that could be used collectively by the entire team.49 Politicians competing for bribes sometimes depend on businesspeople to solve their own coordination problems, such as ensuring that all officials whose approval is required for a project have been satisfied.50 Private companies form cronyistic relations with government officials to win regulatory approval or escape regulatory scrutiny. In turn, government relies on them to drive investment and development, as well as to build schools, hospitals, infrastructure, and face projects. Private firms set up the relatives of top officials with well-​paying jobs and provide money for bribes that officials can use to purchase higher positions in the bureaucracy.51 In turn, private businesses benefit from a greater measure of protection from predation, procurement contracts, and privileged access to development opportunities. During the era of the one-​ child policy, in some cities, the largest taxpayers were given permission to have a second child. In some cases, their children received an extra 20 points on the gaokao, the crucially important high school-​leaving examination that determines a young person’s educational opportunities.52 Cronyism between the owners of private firms and the regime facilitates the exchange of economic rents for the businesses for political privileges granted by state officials. Private businesspeople have a different relationship to government than do the SOEs. The SOEs, both individually and through the State-​Owned Assets Supervision and Administration Commission of the State Council (SASAC), are woven into the party-​state because their directors are appointed through the nomenklatura system and hold high political rank. In their individual regions and sectors, large SOEs wield considerable autonomy, and through SASAC they exercise influence over policy to the extent of blocking policy change that would expose them to greater competition. Large private firms enter into more informal, often personalistic and corrupt, relations with those in power. In both cases the relationship is closer to that of an exchange than either capture by corporate power or by the party. The party holds the upper hand, but it protects those it favors from the pressure of market competition.53 It can rein in private sector oligarchs who challenge the state’s regulatory powers, as in the case of Jack Ma’s thwarted effort to take the fintech Ant Group public. But so far it has hesitated—​much like Putin’s Russia—​to impose a tax on property, which would affect many officials who own expensive real estate far beyond what their official salaries could justify.54 In the state sector, the relevant political alliance is between the executives in the SOE sector and the government. Particularly as the momentum to reform SOEs by exposing them to competition under hard budget constraints

 



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has flagged over the last decade, the state sector has become a powerful independent political force, an indispensable ally of the regime, and a major source of inequality in the distribution of incomes and wealth. Xiao Yaqing, director of SASAC, declared the SOEs to be “the most solid and reliable class foundation” for Communist Party rule.55 Certainly their political support for the regime brings enormous rewards both for them and for their political allies, including substantial policy influence, high wages and benefits, and insulation from market competition. As Chen Tonghai, the former general manager of the SOE China Petroleum & Chemical Corporation, commented in 2009 in defending himself from accusations of appropriating state funds, “Holding the position of eldest son of the republic, if we do not monopolize, who will monopolize?” (Zuowei gongheguo zhangzi, women bu longduan shei longduan?).56 Chinese economists have analyzed the profitability of Chinese monopoly industries. China’s tobacco industry is a state monopoly and a major source of revenue for the state. Over time, although costs have risen, profits have risen far more. Because it is such a lucrative source of revenue for the state, the state has not acted to privatize or break it up and claims that the state monopoly enables it to maintain high-​quality tobacco profits as well as to finance antismoking campaigns. A Chinese economist compared the profitability of the tobacco industry with that of other consumer industries and found that tobacco generated an average profit rate of 30.28% in 2005, rising to 38.74% by 2016. By contrast, the average of the benchmark consumer goods industries rose from 5.52% to 8.21% over the same period.57 The market power of state monopolies enables them to extract rents, which feed government budget needs and enable substantially higher wages in state monopoly sectors than in the private sector, as well as enabling top executives to enjoy high incomes.58 When the government undertook the large-​scale restructuring of SOEs in the late 1990s, it downsized many, sold many more to private owners, and attempted to restructure those it retained. In order to ensure that SOEs were profitable, however, the government sought to protect them from market competition.59 The consequence was that SOEs raised wages for workers and managers over those prevailing in the private sector. Indeed, an analysis of the China Family Panel Survey data finds that median household wealth for those with at least one earner working in the state sector (state or collective enterprises, party, government, or army) is 70% higher than for those depending on the private sector. For those households at the 25th percentile, the ratio is about 2:1.60 Having at least one family member in the state sector therefore enables households to enjoy a higher minimum threshold of security and to amass a higher amount of wealth. As in Russia, the wealthiest, however, are not the executives in SOEs but rather those who took advantage of opportunities to acquire formerly state assets.61 It is this stratum that explains

 

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why almost one-​third of total household wealth belongs to the top 1%—​a percentage similar to that in the United States.62 Thus the high share of rents in the Chinese economy owes not only to innovation; it also reflects the opportunities to amass private wealth that liberalization and privatization opened up to those possessing the right connections. Whether assets are publicly or privately owned matters less for rent extraction, therefore, and for its contribution to inequality, than for the political economy built around the partial liberalization beginning in the 1980s. As in Russia, partial privatization of state assets and partial market liberalization have created immense opportunities for rent extraction and the amassing of income and wealth at the top. China, however, has relied heavily on the use of financial instruments to generate investment capital for housing, real estate development, and public infrastructure by mobilizing private capital. Transactions related to property—​housing and real estate—​account for a large share of China’s recorded GDP growth. As of 2020, real estate was estimated to represent about 29% of total GDP when construction, transactions, and associated spending are included.63 Because so few other investment opportunities are available, private households have treated residential housing as their major asset.64 By 2014, around 79% of urban households owned their home, but only 14.3% of them had acquired housing through the privatization of state-​owned housing. The rest bought properties on the primary or secondary markets, and rarely through mortgage loans.65 Investment in housing and real estate grew rapidly in the 1990s and 2000s to reach 14% of GDP by 2019.66 By 2021, speculation in real estate had grown to the point where the collapse of asset prices poses a serious threat to the economy.67 Local governments also have driven the real estate boom by actively subsidizing development financing through various novel instruments. These are often kept off local governments’ balance sheets in order to avoid saddling governments with debt liabilities, but marketed to investors as carrying implicit government backing. Governments become co-​investors in these funds, further making them attractive to private investors. Similar to the pattern described in Chapter 6, government officials benefit from the financial sector’s ability to finance their political goals in return for giving its investors opportunities to reap rents.68 In both China and the United States, financialization fuels economic growth in a way that disproportionately benefits those with the most to invest and able to realize the highest returns. In China, however, more than in the United States, the state shares ownership and management rights in financial assets with private investors. The state-​created bodies that manage the investment funds enjoy favorable access to credit and regulation, while the private investors in them benefit from the implicit guarantees that the state will absorb the risk of losses. Moreover, the state management bodies have also absorbed

 



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the value orientation associated with the shareholder value revolution in the United States, so that maximizing profits takes precedence over serving any larger interest. Local government financing vehicles’ obligations now amount to more than half of GDP and exceed total official government debt. Their sale and returns help finance local government operations, compensating for the strict limits on local government tax powers, but ultimately their value depends on the market for housing, real estate, and other assets that have been securitized.69 As in the 2008 financial crisis in the United States, therefore, the accumulation of debt that is unredeemable if the value of the underlying assets begins to collapse creates large-​scale systemic risk. Likewise, as in the United States, where local school districts and municipal housing authorities use bonds to raise financing for school buildings, low-​income housing, and infrastructure development, investors benefit from favorable tax and regulatory treatment of the securities.70 Localities with low tax revenues end up devoting an ever-​higher share of their budgets to servicing the debts. In China, as in the United States, therefore, these forms of financialization whose ostensible purpose is to provide public goods often in fact redistribute incomes upward.

8.2.  Market Power and Inequality in China Liberalization and the rise of the private sector have produced extraordinary economic growth in China. By far the greatest share of economic growth has come through entrepreneurship under intensely competitive conditions. Yet as noted above, the intertwining of political self-​interest on the part of China’s officials with the commercial interests of entrepreneurs has also resulted in pervasive rent-​seeking, cronyism, and corruption. As in Russia, liberalization in China created numerous opportunities to appropriate rents. As the venerable Chinese economist Wu Jinglian has long argued, partial liberalization created rents in many ways for those enjoying insider access to state-​granted privileges. These included high markups for goods acquired by companies at low plan prices and resold at higher market prices, or bank credits received at low subsidized rates and then issued at commercial rates, or goods imported under plan quotas and sold on the market at higher prices.71 These three types of monopoly rents alone are estimated to have represented around 30% of national income in the 1980s. They also stimulated corruption as private interests bribed officials for these rent-​extracting opportunities by kicking back some portion of the rents.72 A Chinese economist calculated the total rent streams from price, exchange rate, and interest rate differentials in the late 1980s and early 1990s. These grew from around 30% of national income in the late 1980s to 32.3% of national income by the early 1990s.73 As the township-​village enterprises became major drivers

 

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of market activity in the 1980s, they formed mutually supportive ties with the party and government. The state needed the firms to generate revenues, and the firms needed the state to protect their market positions.74 Although further economic reforms closed some opportunities to generate rents, they created others. Cronyism and personalism in relations between policymakers and enterprises continue to offer lucrative rent streams, while the protection from market competition for SOEs enables them to profit from monopoly rents. In both state and private sectors, the exchange of rent-​generated income benefits both sides but reinforces the concentration of income and power at the top. For example, much like their Russian counterparts, China’s SOEs generate high incomes for their top executives, the greater part of it hidden. Concealment in part reflects public sensitivities.75 Chinese leaders have periodically tried to cap SOE salaries.76 For example, in 2002, SASAC set a limit on the base pay for executives in Chinese SOEs, limiting it to no more than 12 times the average employee salary.77 But caps of this kind are easily circumvented by the use of various informal practices that provide supplemental in-​kind and cash benefits to high executives.78 Private sector executives also substantially raise their incomes through similar schemes. Like American executives, they are offered incentive pay and perks (such as fixed allowances for entertainment expenses), as well as stock options.79 For this reason, we must take reports of cuts in salary with a grain of salt, since bonuses are not reported as part of salary. But bonuses and perks can constitute well over half of the total compensation of private sector managers.80 A recent report states that “the main source of income for top Chinese executives is indirect compensation, for example flexible allocations for communications or travel expenses.”81 Thus both owners and managers of private sector firms and executives in the state sector enjoy very high incomes, although most of the income is not reported as income. This is the reason that official figures on top-​end income shares are not credible. As the compilers of the annual Hurun Rich List for China note, “For every richlister we have found, we have missed two” as a result of the fact that the wealthy often “go to extraordinary lengths to hide their wealth.”82 The latest estimates of income distribution in China by economists Chuliang Luo, Terry Sicular, and Shi Li imply that high-​income stratum, comprising between 7% and 8% of the population, receives approximately 30% of national income.83 The monopoly position of large SOEs enables them to extract rents and convert them into income premiums for their employees, particularly for the highest-​ ranking employees.84 According to Chinese experts, once other branch-​level and individual worker-​level characteristics are taken into account, the monopoly or partial monopoly status of state enterprises is associated with about 65% of the

 



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difference in average wages across industry branches.85 Similarly, Yue Ximing, Li Shi, and Terry Sicular find that over half the wage gap between monopoly and competitive industries is due to the administratively granted monopoly status of state enterprises rather than other individual worker and branch characteristics. They conclude: “The source of high incomes in monopoly industries is imperfect competition.”86 Other scholars reach similar conclusions, finding that monopoly drives both wage differentials between state-​owned and private companies, and inequality in pay levels within monopoly SOEs.87 Therefore, the monopoly rents appropriated by the SOEs are shared to some degree with their workers but still more with their top executives. In turn, by providing the regime with a secure source of revenues and political support, they share a portion of their monopoly rents with the state and its rulers as well. The alliance between powerful SOEs and the regime, at both the central and local level, serves to stabilize the regime economically and politically, but at the cost of high inequality and lower aggregate productivity.88 Small firms in the private sector in China operate in a far more competitive environment than do SOEs. Profit margins are narrower and the failure rate higher. Many firms respond by cultivating close relations with the authorities.89 Although they generally have little direct influence over policymaking, they do benefit from economic favors in exchange for their loyalty to the regime.90 Far from being politically or economically independent of the state, private business owners, particularly those with large holdings, must comply with the political demands of government officials. At the same time, those with greater access to influential officials (such as by holding seats in a people’s congress) can make use of those contacts to protect themselves from predation by government and private rivals and gain opportunities to win beneficial contracts.91 The segmentation between the sectors exposed to market competition—​ generally the privately owned firms—​and those protected from it—​the state-​ owned sector—​ is not absolute. Some state-​ owned firms do compete for profits, and many larger private firms enjoy the patronage of political officials. Nonetheless the dualism of the economy has persisted from the beginning of the reform era to the present. Certainly the regime has not made a serious effort to impose a fully competitive market environment on the state sector.92 The large rents generated by the collusion between businesspeople and political officials have fostered the accumulation of incomes at the top of the income distribution even as they have raised incomes dramatically for lower-​income strata. The scale of income inequality is therefore hard to judge. According to one study, as much of 30% of Chinese GDP goes unrecorded, and as much as 60% of that flows to the richest decile of the population.93 Much of this income comes from compensation packages for state and private sector executives that include various in-​kind perks that can be converted to cash. The value of

 

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bonuses and in-​kind perquisites can be many times base salary for an SOE manager and is readily concealed from income tax declarations. These include phony invoice schemes and expense-​padding, as well as lavish gifts that are readily convertible to cash, large cash gifts to family members at weddings and birthday celebrations, and outright kickbacks in procurement schemes.94 Much is simply derived from bribery and kickbacks. Procurement contracts, real estate leases, permits for commercial enterprises, tax exemptions, and bank loans all enable corrupt rent-​sharing between businesspeople and officials.95

8.3.  Income Growth and Inequality Economic growth in the first two decades of China’s liberalization raised incomes for nearly the entire population, but widened the gap between upper-​end and lower-​end incomes. Although mean incomes soared, the gap between the mean and the median income widened. One estimate by Chinese sociologists found that the ratio of median to mean incomes fell from 84% to 58% between 1988 and 2007.96 The income share of the highest quintile rose, while the shares of all other quintiles fell, especially after the mid-​1990s. The gap in incomes between the eastern regions and the rest of the country increased, as did differentials within social groups. By the mid-​2000s, around one-​third of the urban population could be classified as middle class—​business owners (about 11% of the population) and managerial and professional staff in offices (about 21% of the total). These included both state and private sector employees. Another third of the population comprised lower-​ranking clerical and service workers. A little over a third were working class.97 Working with their Russian counterparts to compare the size of the middle class in each country as of 2015, the sociologists found that China had somewhat larger shares of the population in the lower-​and upper-​income groups, and fewer in the middle (Table 8.1).98 These estimates are consistent with the calculations by other scholars using the Chinese household survey data. For 2013, they estimate that the middle-​ income group—​taking all whose incomes were 135.36–​451.2 RMB per day as

Table 8.1: Russia and China: Class Composition of Society, 2015, by Income Category (%) Low income

Lower middle

Middle higher

High

Russia

33.50

34.55

21.93

9.57

China

39.45

20.22

18.05

22.28

 



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the criterion—​had grown rapidly and now constituted about one-​third of the urban middle class.99 As the Chinese scholars emphasized, the size of each social class was less important than the trends of development and particularly the ability of the society to satisfy the aspirations for upward mobility on the part of those in lower-​ income groups.100 Failure to enable upward mobility was not only dangerous for social stability, but would contribute to keeping China locked in what some call the “middle-​income trap.” A society with a large class of middle-​income consumers can base its economic growth on mass consumption, whereas a society marked by high inequality cannot. Therefore, the scholars urged that China raise the incomes of those in the middle more quickly than those at the top. We can draw two conclusions from these figures. First, although mean incomes for both urban and rural households have risen significantly during the years since the reform and opening up policy began, income growth has been fastest for those in the highest income strata, those whose incomes are most hidden from view, so that overall income inequality has increased. Second, the middle-​income group consists of large numbers of people closely tied to the state—​whether directly employed by the state or dependent on personal (and sometimes corrupt) relationships with state officials. They put on the red hat, that is, register as a public enterprise, form a party cell, win a seat in the local people’s congress, recruit government officials to their boards, make officials shareholders, or cultivate personal friendships with officials.101

8.4.  Spatial Inequality In both Russia and China, a large part of aggregate income inequality results from cross-​regional differences.102 Spatial inequality in both countries is much higher than in the United States. To a large degree, this is because the United States has long had a more integrated set of market institutions across the country than have Russia or China. The continuing legacy of slavery and of the Jim Crow regime in the South still strongly shapes income distribution in the states where White resistance to integration blocked the expansion of free market and political competition. However, median incomes and the ranges of income distribution across the states in the United States are far more similar than is the case in Russia or China. China began its efforts at “opening up” by seeking to attract investment in special economic zones located along the southeastern coast. As the number of special economic zones increased, spreading to more regions and cities in coastal regions, market-​oriented economic growth propelled the compounding of those regions’ advantages over regions in the central, northern, and western parts of the country. Those cross-​regional differences remain large

 

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despite decades of efforts by the government to plow infrastructure investment into them. In Russia, although the reform program applied nationwide, the extreme concentration of administrative power in Moscow and of natural resources in a relatively small number of areas resulted in a similar compounding of relative regional advantage and disadvantage. Cross-​regional income gaps therefore grew and have remained high despite efforts by the central government to equalize budget revenues across regions. However ineffective the structural reforms and privatization policies of the 1990s were at stimulating higher factor productivity, they allowed those state and private enterprises that controlled valuable natural resource assets to collect immense rents through the opening up of overseas markets for oil, gas, minerals, timber, and fish. The result was that those Russian regions enjoying competitive advantages, above all in mineral resources, benefited much more from the recovery in the 2000s than did regions still dependent on the legacy of Soviet manufacturing. Enormous returns flowed to the oil and gas sector and to the financial sector supporting it, driving up wage levels far beyond those in other branches of the economy. Those regions with a heavy concentration of oil and gas extraction in their economic profiles experienced rapid growth in output per capita, which translated into high per capita incomes, wages, and per capita output. Moscow benefited as well from rents due to its administrative status as capital; most of the major national companies keep their headquarters in Moscow in order to remain close to the national political elite and financial institutions.103 Moscow and the oil-​and gas-​producing regions therefore outpaced other regions in the rate of growth of incomes and output. Income rents are feeding regional inequality, as well as cross-​income class inequality. As a result, contrary to the expectations of convergence theory, no clear overall trend toward cross-​regional differences in incomes is evident in either country since liberalization began.104 An analysis of the growth of inflation-​adjusted mean incomes of regions over time shows that in both countries, mean incomes, wages, and output, partly driven by the extreme concentration of incomes in the richest regions, have risen more rapidly than the standard deviations. More telling is the fact that in China the differentiation across regions in the middle of the distribution—​measured as the interquartile range of the distribution of regions over time—​has grown many times over.105 A leading Russian specialist on regional inequality distinguishes among “four Russias” that differ not only in incomes and economic structure, but in social structure and cultural attitudes as well.106 About 40% of the population live in cities with a population of at least 250,000. Only a handful of these have grown primarily by increasing employment and investment, and their populations have risen from in-​migration of workers from other regions. A second stratum is cities

 



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with at least 50,000 population and less than 250,000; most of these depend on Soviet-​era industrial employment that is not viable in an open economy, although a few have industries with exportable goods such as oil, gas, and coal, or metallurgical products. Most of the rest are in declining, losing population and heavily dependent on federal transfers. A third segment is the rural sector consisting of villages and small towns. Around a third of the population lives in these areas, although this population is aging more rapidly than the rest of the country as younger people move to other locations. The final group consists of low-​income regions in the North Caucasus and southern Siberia regions. These regions account for only about 6% of the total population but experienced significant deindustrialization and decline after the transition, and, in the case of the North Caucasus, continuing ethnic and religious violence. The population depends mainly on employment in the informal economy and on federal transfer payments. The differences across these groups of regions are marked and stable. Although some equalization of mean incomes across regions has occurred, in the more prosperous regions top-​end incomes have pulled away from incomes in the lower and middle parts of the distribution as the dynamics of growth have brought rising inequality.107 In the last decade, inequality in mean incomes across regions has declined as a result of concerted efforts by the government to raise lower-​end incomes through higher public sector salaries, pension payments, and social relief measures. However, differences in investment and growth rates have widened. In a number of poorer regions, workers depend on seasonal employment in other regions. Most regions depend—​some very heavily—​on budget subsidies from the central government to maintain incomes and stability. These efforts reflect the fact that equalization of incomes depends on the growing share of state spending on public sector employees (both state employees and those in “budget sector” jobs such as doctors and teachers) and on social support. The pattern of growth in Russia is not conducive to the flows of productive investment from richer to poorer regions that would tend to equalize incomes and growth rates through convergence. In China, a major driver of cross-​regional inequality is the wide difference in incomes between the rural and urban sectors. We have sufficient data to be able to decompose inequality into the components that are shared and those that are due to differences in average incomes across provinces. When we do, we find that only half of total inequality is common to them. Using the 2014 China Family Panel Studies data,108 which provide sufficiently large and representative samples of the population for a set of five widely different provinces (Liaoning, Shanghai, Henan, Guangdong, and Gansu), we find that fully a third of overall income inequality comes from differences across provinces, whereas less than half is shared between them. This of course is based on a very restricted sample,

 

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so we should be careful before generalizing it to the entire country. Nevertheless, it reveals the wide differences in income levels across provinces. In the United States, by contrast, capital and labor flow much more freely across states, helping to bring about convergence in income differentials between them. In other words, inequality in the United States is more pronounced within states relative to between them, whereas in Russia and China, more inequality is between regions relative to within them. A few provincial-​level units are entirely urban, but most provinces comprise populations of both urban and rural residents as classified in the hukou system. The hukou system registers all individuals according to their urban or rural administrative status as well as a particular place recoded as their permanent place of residence. Almost two-​thirds of the population hold a rural hukou status). Since many rural hukou holders work in cities, the urban population by residence is well over half the country (64%, according to the 2020 census).109 Moreover, since the rural population’s birthrate is higher than that of the urban population, around three-​quarters of children under the age of three are classified as rural.110 However, rural migrants in the cities face numerous barriers to full equality of opportunity. Depending on the city, they are restricted in the schools to which they can send children, the healthcare facilities they can use, the ability to buy property, and their entitlement to social benefits.111 They tend to hold the lowest-​wage, lowest-​skill jobs or work in enterprises at wages lower than urban hukou holders working alongside them.112 When income inequality in China is decomposed, as much as half of it is due to the differences in mean incomes of urban and rural residents.113 The fact that many rural hukou holders are working for wages in the cities mitigates the divide between the incomes of rural and urban incomes, but not the divide between urban and rural hukou holders. The urban-​rural gap and cross-​regional gap may have closed modestly in recent years, but it is hard to establish this with any certainty in view of the concentration of income growth among the very highest-​income groups, whose incomes tend to be invisible in household surveys.114 As in the United States, high inequality across income classes and across spatial units contributions to lower income mobility across generations. Over time, the correlation between the lifetime incomes of parents and children is growing, as it is in the United States, and particularly for those in urban and coastal areas.115 Overall intergenerational mobility in China is approximately at the same level as in Japan and the United Kingdom, higher than in the United States, but lower than in Canada or several European countries.116 Although overall mobility is rising, the gap between rural and urban mobility rates is extremely high. One reason for slowing mobility is that educational opportunity in China appears to be narrowing for children born to poor and rural families.117 As of 2010, fewer than 20% of rural children were entering high school, and still

 



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fewer were entering universities.118 A major reason for this is the low level of educational attainment in the rural regions. Among adults 25 to 64 years of age, only 11% of the rural population have a secondary school diploma, whereas 44% of the urban adult labor force do.119 Health and nutritional problems contribute substantially to this gap. Around 60% of children of elementary school age in rural regions suffer from one or more of three principal problems: parasitic intestinal worms, poor eyesight, and nutritional deficiencies.120 Coupled with the low quality of vocational schools, where rural school children are commonly channeled, educational and health deficiencies among the rural population reinforce the continuing inequality in incomes and opportunity between the rural and urban populations. The low educational levels of rural migrants in the cities leave them vulnerable to layoffs as enterprises shift their production to lower-​ wage countries—​a pattern we are only too familiar with in the United States.121 As Chapter 2 mentioned, the theory of convergence of incomes and growth across regions holds that convergence occurs when administrative barriers to the free flow of productive resources are lifted. Such barriers can include restrictions on the movement of labor—​such as regimes of involuntary servitude, household registration rules (the hukou in China, the internal passport in Russia under Stalin, and household residence registration system—​propiska—​throughout the Soviet period and surviving in different forms in Russia to this day). Even in the absence of administrative barriers, extreme differences in housing market prices, high transportation costs, limited information, and strong social ties to place inhibit the movement of people across regions in search of better employment. Capital flows too can be restricted by administrative obstacles, such as local protectionism, government policy controls over finance, or poor governance. Market fundamentalists often assume that the force of market incentives will ultimately prove stronger than such political hindrances. Strong evidence exists, however, for doubting this as a general principle. Consequently, where local political leaders benefit from maintaining control over the extraction and distribution of rents from the suppression of open flow of productive resources, differences in incomes and opportunity can persist and even widen over long periods of time. Moreover, when divergence of incomes across regions outpaces forces for convergence, inequality reproduces itself at the household level over time. This is because, as Chapter 2 emphasized, many of the factors contributing to mobility within and across generations are specific to locations: availability of public goods and services such as sanitation, healthcare, education, safety, and recreational amenities; social structure of communities; and employment opportunities. Where advantage and disadvantage are concentrated locally, they contribute to the likelihood that individuals can shape their own life chances. Concentrated disadvantage creates multigenerational poverty traps, no less in .

 

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China or Russia than in the United States. When the provision of public goods is replaced by privatization, or eliminated through budget austerity or through “draining the pool” politics to hold another population down, inequality is reinforced and replicated over time.

8.5.  Government Policy Responses to Inequality In the last chapter I noted that after the public protests of 2011–​12, Putin avoided the subject of inequality, instead calling for fighting poverty. Xi Jinping’s regime evinces a similar skittishness about tackling inequality directly. This is reflected, among other things, in the government’s reluctance to publish accurate estimates of inequality’s scale. An indication of the sensitivity of the issue was that just before his fall from power in 2012, Chongqing party leader Bo Xilai claimed that the Gini index in China had reached 0.46, and warned that “if only a few people are rich, then we are capitalists. We’ve failed.”122 This was undoubtedly a desperate move to save his political career, but it backfired. The next day Bo was expelled from his leadership posts. Two days later, however, Prime Minister Wen Jiabao declared that the government would do more to reduce inequality.123 There continues to be considerable controversy over the true scale of inequality in China.124 Probably the most authoritative estimates are those constructed by the team of scholars including Terry Sicular and Li Shi and their associates on the basis of the Chinese Household Income Survey (CHIPS). They conclude that overall income inequality rose rapidly in the 1980s and 1990s, grew further in the early 2000s, and then appeared to decline after 2007.125 However, they recognize that the data from the household surveys do not accurately reflect the scale of income inequality. Using the Pareto coefficients taken from the rich lists for China, they suggest a corrective.126 If the top income group whose incomes are not captured by the surveys comprised 7.68% of the population in 2013, the actual Gini would be 0.58 rather than 0.40. The official estimates reported a decline in the Gini index between 2007 and 2013 from 0.43 to 0.40, but if their calculations are correct, the actual Gini rose from 0.49 to 0.58.127 Like Putin, Xi Jinping has tended to emphasize the fight against poverty rather than against inequality. And, as in Russia, the policy measures used have been relatively modest, sparing the highest income strata from sacrifices. The largely nonredistributive nature of China’s systems of taxation and social spending, the continued use of categorical rather than targeted social benefits, the widespread diversion of public resources into private gain by state officials, and rising labor market dualism mean that inequality in earnings is translated directly into high inequality in disposable income. In some respects, social policy

 



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deepens inequality. By some estimates, the net effect of social benefits other than housing is to increase income differentials.128 Social assistance programs exist but are meager. For example, China’s minimum livelihood subsistence guarantee for urban hukou holders, the so-​called dibao, is means-​tested but extremely low.129 Neither in intent or effect is it redistributive. The same is true of social programs in Russia, where no more than 5% of total benefits are means-​tested.130 Even most of the means-​tested subsidies do not reach the poor; half the poor receive no means-​tested benefits at all.131 The cumulative effect is to compound advantages for those well-​off enough to benefit from access to better services. As in liberal market economies such as the United States, the entrenchment of privilege also increases the ability of the rich and powerful to block moves toward more redistributive taxation and spending or broader pooling of risks and benefits. Both China and Russia still rely heavily on taxes that are administratively less costly to collect than consumption-​based taxes, resulting in regressive tax structures. Although payroll tax rates are relatively high in both countries, they are capped at relatively low ceilings, imposing a proportionately greater tax burden on low-​and middle-​income individuals in the formal sector. In neither country do income tax revenues form a large part of government revenues; both governments rely much more heavily on turnover and consumption taxes (consumption taxes including the VAT form over half of total tax revenue in China, about 40% of federal taxes in Russia). The personal income tax yields only 7%–​ 8% of total tax revenue in China, about 21% in Russia, and in both countries it is principally a source of revenue for subnational governments.132 About half of Russia’s federal budget revenues come from various mineral resource-​related taxes.133 In China, the tax system is even less progressive despite a nominally progressive income tax.134 The richest pay a much lower share of overall income tax than their share in income.135 The relatively low income ceilings on payroll taxes mean that high-​end earners pay a much lower share of their total earnings into the social insurance system than lower-​income groups, while informal labor is not paying in at all. This fact imposes a substantial burden on middle-​income earners in the formal sector and on state enterprises, where compliance with payroll taxes tends to be higher. Awareness of and dissatisfaction with income inequality appear to be rising in China, although firm evidence on the point is scant. Studies of public opinion survey data from the first decade of the 2000s found more acceptance of inequality than anger or dissatisfaction.136 Although the great majority of respondents believed that inequality was too high, they also, much more than respondents in other countries, accepted the view that hard work and ability could enable a person to get ahead. The great majority believed that they and their families would be better off in 5 years than today. It was this optimism, coupled with the

 

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reaction against the coercive egalitarianism of the Mao era, that may explain the relatively high toleration of inequality. Some scholars have sought to determine whether attitudes have changed since then. One study comparing three waves of national survey data from 2004, 2009, and 2014 found that attitudes changed significantly after 2009. In the latest wave, many more respondents took the view that inequality was too high and that it contradicted socialist principles than had been the case in 2004 and 2009. Many more declared that inequality was not the result of differences in merit, and that the privileges of the wealthy were unfair. These attitudes, in turn, were correlated with mistrust of the provincial and local governments.137 Such findings—​no doubt corroborated by the party’s own internal surveys—​ may have been one reason for the turn to a more egalitarian ideological line under Xi Jinping. Rising popular awareness of and dissatisfaction with inequality, underpinned by the view that official corruption and privilege, more than hard work and ability, were fueling it, undoubtedly formed part of Xi Jinping’s motivation for demanding that the party return to Marxist principles. Xi launched a large-​scale campaign against corruption and the lavish lifestyles it financed. Hundreds of thousands of officials have been indicted; the gambling-​dependent economy of Macao was decimated. For all the Maoist rhetoric, however, Xi has had to tread extremely carefully when it comes to reversing the concentration of top-​end wealth and income and attacking materialist and consumerist values because of his unwillingness to launch a sweeping redistribution of wealth. A clear example of this caution is the recent adoption of the policy goal “shared prosperity” or “common prosperity” (gongtong fuyu), which aims at achieving a more “balanced” income distribution.138 In June 2021, the Central Committee and State Council issued a decision calling for the creation of a “demonstration zone” (shifan qu) in Zhejiang Province to implement several principles intended to reduce income inequality.139 These include measures such as raising wages overall and particularly for lower-​and middle-​income groups; increasing the use of redistributive measures such as social support and retraining; encouraging greater property income from land and capital on the part of lower-​and middle-​income groups; equalizing public services between rural and urban sectors; and improving the quality of professional education and training. It is notable that the government chose Zhejiang for this experiment, since Zhejiang is a high-​income province with a thriving commercial sector. Raising lower and middle incomes, therefore, as a way to reduce income differentials may pose fewer redistributive problems than elsewhere. However, as in the past, the government refrained from introducing a property tax as a means of financing investment in public goods. The solutions proposed, as in the past, avoid the political difficulty of imposing higher tax obligations on the wealthy.

 



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Official concern with mounting inequality is also evident in comments made by the party secretary for security in November 2021 that the common prosperity strategy is intended to reduce the “deep-​rooted risk and hidden peril caused by [unequal] income distribution.”140 The proposed solution, however, is modest. Rather than calling for a major reform of the tax system, he demands that the security forces concentrate on stricter enforcement of current law in order to curb tax evasion. A recent commentary in China Business News offers more detail. The article uses the current campaign against rich celebrities to illustrate the multiple ways in which wealthy people avoid paying income tax. Very much like their American counterparts, high-​income Chinese use legal and quasi-​legal means to report labor income as business income. The top marginal income tax rate on personal income is 45%, whereas the top rate on business income is 35% and capital income is taxed at a flat rate of 20%. Therefore as much as possible, those receiving high compensation for their labor services incorporate as solely owned businesses (or, still more advantageously, as cooperative businesses) and reduce their tax rates significantly. Many also use false invoices, phony contracts, and declarations of hollow intangible assets.141 The focus on popular culture celebrities’ abuse of these practices, rather than those of wealthy businesspeople, underscores the point that the authorities are not raising marginal rates on personal, business, or capital income, but simply promising stricter enforcement of existing law. A dramatic illustration of the tension between the bold calls for “common prosperity” and the regime’s dependence on the administratively generated rents from private and state firms is the Li Guangman episode. A writer named Li Guangman, formerly editor of a trade publication for an electric power company and columnist for a now-​defunct website, posted a long commentary called “Everyone Can Sense That a Profound Transformation is Underway” to his WeChat account in late August 2021. Several media outlets immediately republished his essay, among them People’s Daily and Xinhua—​two of the leading central-​level news platforms in the country. The tone and content of Li’s post echoed the militant rhetoric of the Cultural Revolution. After a lengthy diatribe against a few pop culture celebrities who had been canceled over tax evasion and offenses against traditional cultural values, Li noted other recent regime moves, including the suspension of the Ant Group IPO, the new emphasis on the theme of “common prosperity,” and the grand celebrations of the party’s centenary. All these actions, he claimed, signaled the coming of a “profound revolution” that would sweep away “capitalist cliques” and bring back the People to the forefront of society. In dramatic Maoist fashion, he celebrated “the return of red, the return to heroes, the return of blood” (hongse huigui, yingxiong huigui, xiexing huigui). Like Mao and the Gang of Four, Li demanded thoroughgoing cultural change: “We need to

 

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control all the cultural chaos and build a lively, healthy, masculine, strong, and people-​oriented culture” (women xuyao zhili yiqie wenhua luan xiang, jianshe xian huo, jiankang, yanggang, quianghan, yi renmin wei de wenhua).142 Four days later, the editor of the aggressively pro-​regime, anti-​Western publication, Global Times, Hu Xijin, published a rebuttal of Li’s post.143 Calling Li’s article misleading and inaccurate, Hu declared that China’s leaders have been following an orderly course of measures aimed at preserving the “reform and opening up” mixed-​economy model—​which did not at all amount to a revolution. He. He particularly objected to the rhetorical tone, which “would evoke some historic memories and trigger chaos in minds and panic among people.”144 Rather than publishing it in Global Times, however, he posted it to his personal blog. Then the censors ordered that the post not be shared on Weibo or WeChat; several hours later, the ban was lifted, and the post could be shared again. Reports from media sources indicate that the regulators issued oral instructions to media editors that acknowledged that Li’s post had had a wider impact than they had anticipated. Rather than demanding that they rescind or refute it, however, they asked editors to balance it with less inflammatory content.145 After that, the controversy subsided. Li Guangman continued to post content, but it was less heated. The leadership made it clear that they would continue to intensify restrictions against Western influences and press the common prosperity theme, but not shutter all large private businesses or enact draconian redistributive policies. The Li Guangman episode reveals official ambivalence about how much the state intends to balance market activity and private capital ownership with state control. Second, at a deeper level, that ambiguity indicates leadership divergence over basic economic policy choices. There is a basic tension between Xi Jinping’s need for supreme personal power and the fact that the regime rests on a series of tacit understandings among powerful bureaucratic and business interests. There is a widespread expert consensus around the need to build a middle-​class society, one where the middle-​income strata are the dominant force in society, and concern over high inequality. One recent commentary notes that China’s society is about 30% middle class, and argues that China can improve economic and social stability by raising that proportion to two-​thirds.146 However, the leadership has consistently avoided acknowledging the extreme concentration of incomes at the upper end. Instead, it has continues to call for raising low-​end incomes through measures such as a higher minimum wage and more effective social assistance programs. Despite the conspicuous assaults on a few visible tycoons and celebrities, even in the most recent phase, the leaders have been cautious about arguing for an effective progressive income tax system, an estate tax, or surtaxes on high incomes. The regime is moving extremely cautiously in introducing a property tax, for instance, authorizing only small-​scale local experiments.

 



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At present, policymakers are working to channel the “common prosperity” initiative into less politically costly policy forms, such as the notion of “tertiary distribution.”147 In Chinese parlance, primary distribution is the result of the marketplace, where contributions to production determine the returns to labor and capital. Secondary distribution occurs through redistributive mechanisms, specifically taxes, social insurance contributions and benefits, and social transfers. Tertiary distribution—​the channel that the current policy emphasizes as the way to achieve “common prosperity”—​is voluntary donation of money and time to the nonprofit sector. Experts are calling for a reform of the tax code to provide material incentives through tax deductions for such contributions. However, given the current political climate, many wealthy individuals have found it expedient to make sizable and well-​publicized donations to worthy causes. Lacking in the current debate is a reconsideration of more basic economic and political institutions that have fostered cronyistic and corrupt exchanges of benefits between wealthy entrepreneurs and political officials. The calls for “common prosperity” therefore reveal the limits on policy choices available to Xi. These are grounded in the multiple compromises his regime must make to retain power, between the monopoly of an ideologically driven Communist Party and its dependence on an economy dominated by politically favored state and private companies that feed the regime with taxes, kickbacks, and privileged ownership shares. The leaders seek to respond to rising awareness of the extreme economic inequality in the country by taking measures to curb the excesses associated with particular firms and sectors, and by reaffirming communist values. At the same time, they dare not move too far toward policies that would seriously harm the interests of the richest strata of entrepreneurs and managers who have locked in their advantageous positions by cultivating the favor of politicians at the local and national levels. Little wonder that new leftists are seizing on the opportunity to press for a radical turn away from the partial reform economy back toward Maoism, or that establishment party leaders and experts find it necessary to warn against any substantial steps toward a more far-​reaching redistribution of wealth. In a polity where ideology and power are intertwined, the deepening of contradictions between the avowed doctrines of the regime and the actual institutions and practices its power rests on results in a gulf no amount of central control can bridge. In both Russia and China, high income inequality exacerbates the redistributive tensions inherent in fiscal and social policy. Although the governments of both Russia and China have indicated their awareness of the potential threat to regime stability from high inequality, they have so far been unwilling to take decisive measures to address it in any ways that would threaten the interests of the most privileged segments of society.

 

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8.6.  Strangled Democratization Although China had little or no open political contestation before market reforms began, and then shut down public demands for democratization with the Tiananmen Square massacre in 1989, party leaders did tolerate calls for limited political reform well into the 2000s. For example, the government encouraged contested elections at the village level, ran experiments for competitive elections of officials within the party, and tolerated within-​system reformers such as Yu Keping, a scholar on the staff of the party Central Committee who published a widely publicized book called Democracy Is a Good Thing in 2009.148 Under Hu Jintao and Wen Jiabao, the leaders hinted—​at least to foreigners—​ that they foresaw the possibility of a long, slow, incremental progression in the direction of some form of democracy “with Chinese characteristics.”149 They certainly embraced the notion that the rules of policymaking should become more institutionalized. The party experimented with several forms of limited political liberalization. Among these were public participation in deliberation over local budgeting in two towns, an experiment that spread for a time to higher levels. A few townships introduced open public hearings on policy issues. The practice of electing village committee leaders spread widely across the country in the 1990s and early 2000s. Within the party, some localities introduced indirect elections for party secretary. However, these experiments faced significant resistance and were prevented from spreading further, particularly after 2003.150 Speakers at a conference I attended at the Institute of Political Science of the Chinese Academy of Social Sciences in Beijing in December 2012 focused largely on the defects of Western-​style electoral democracy. Some praised Singapore’s governance system and compared the selection of leaders by lot favorably to the corruption and conflict that attends Western elections. Already by that time, before Xi Jinping had established his own policy line, the thinking of the top party think tank dealing with political theory had turned decidedly against electoral democracy, particularly as practiced in the West, and toward more centralized and left-​leaning models of rule.151 Then all serious discussion of political liberalization ended with Xi Jinping’s ascendancy. Xi has imposed strict authoritarian rule. The vague promise of the pre-​Xi period that the system of village elections would be gradually extended to higher levels of government has been forgotten.152 Xi has centralized power in himself, renewed the official emphasis on the party’s leading role and party ideology in all spheres of communications, and adopted a militantly anti-​Western line in foreign policy. Under Xi, surveillance of social media, monitoring social behavior in neighborhoods and public organizations, and tight restrictions on media discussion have advanced to levels not seen since Mao Zedong’s era. Xi has redefined the concept of good governance around strict top-​down discipline

 



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within the state. Far from initiating a program of economic liberalization, Xi has given further priority to the role played by SOEs as pillars of state interests in the Belt and Road Initiative and upgrading science-​and technology-​driven production.153 Xi has curtailed the use of local experimentation as ways to test alternative models of reform in favor of more centralized control over the economy and greater reliance on SOEs to drive modernization. The range of information and debate about policy alternatives has narrowed as a result.154 Even the limited debates that were tolerated in the 2000s—​such as over environmental policy issues155—​have been stifled. As in Russia, market transition has led to an oligarchic alliance of those benefiting from extreme concentration of economic resources and a monopoly on power by the rulers. A former senior Central Party School professor who now lives abroad declared that “the Communist Party regime has been reduced to oligarchy” (zhong dang zhengquan jin yi bu lun wei zheng zhi guatou tong zhi).156 Why has the development of the middle class in Russia and China not led to pressures for democratization? The argument laid out in this book suggests an explanation. Had the gains from economic growth been more evenly distributed, so as to create a broadly shared interest on the part of growth’s beneficiaries in protecting their political rights, the middle class would have been more likely to support democratization. The cases of South Korea and Taiwan are often cited as examples.157 There, as incomes and numbers in the middle of the distribution grew, and both labor and business became more organized, confident, and independent of the state, it pressured the state to widen political rights. This point is hardly new. As long ago as 1959, Seymour Martin Lipset observed that whether income growth produced an “elongated pyramid” where the largest part of society was at the low-​income base, or rather a “diamond with a growing middle class,” affected the likelihood that development would result in stable democracy.158 The pattern of liberalization in Russia and China skewed the distribution of incomes by relying so heavily on administrative rents to generate growth. This produced faster growth of income for those at the top, both in the private and state sectors, and reinforced their dependence on the state for favors that protect their rents. Preserving personal ties to those in power is a more immediate guarantee of security, therefore, than would be support for enlarging rights of political representation to all on an equal footing. Even though both countries raised lower-​end incomes substantially—​China in extraordinary numbers—​ growth raised top-​end incomes even more. The business enterprises that produce profits—​whether state or private—​need state protection to prosper. Even though as individuals, owners and executives are vulnerable to arbitrary state repression, as a group, the regime depends on them for economic growth, investment, and revenues. In turn, business cannot do without maintaining personal, privileged, and often corrupt exclusive relations with those in power.

 

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In neither country does the middle-​income group constitute a middle class, a bourgeoisie, in the classic European sense of a class of property owners—​the class of whom the great social scientist Barrington Moore famously wrote, “No bourgeois, no democracy.159 Rather, in both Russia and China, a very large share of the middle class, as defined by income, consists of people employed by the state or tied to it.160 And a middle class that consists predominantly of civil servants, state-​employed professionals, and police and military officials does not press claims for democratic rights and representation. Rather than collectively defending their common interest in securing their rights, they seek private, individual solutions. As the Chinese social scientists in the comparative inequality project wrote, “Business owners normally maintain close relationships with the government and its officials, and through certain means even influence the government with regards to economic policymaking, especially at the local level, but their influence in the political sphere has been greatly restrained. Generally speaking, the class of the business owners tends to pledge political allegiance to the government in exchange for economic favors.”161 China’s achievements in reducing poverty and opening opportunities to earn a good living to the vast majority of the population are extraordinary. However, the benefits of economic liberalization have been highly unequal across both income strata and regions, and public goods provision is extremely selective. The opening up and reform course has favored urban residents over rural in the design of social insurance mechanisms, educational spending, and infrastructure. The selective provision of public goods in China has left the rural sector lagging in incomes and opportunity. Full and partial privatization of many formerly state-​provided public goods and services—​including education, healthcare, housing, childcare, and recreation—​created income streams for private interests and widened inequality of access to opportunity. Public secondary education is expensive for poorer families. A study in 2009 found that the cost of attending a public high school for 3 years was equivalent to 10–​15 times the net income of an individual in one of the poorer rural regions.162 As in Russia, the old socialist system of vocational education has deteriorated sharply despite continuous efforts by both governments to upgrade it.163 This is one reason that the economic return to vocational education is so low.164 Selective provision of public goods by the government and partial or full privatization of public goods both tend to concentrate advantage rather than to broaden opportunity. In other societies, provision of public goods has expanded when political competition among parties representing broader strata of the population motivates policymakers to raise investment in widely available social goods such as education, healthcare, childcare, housing, infrastructure, social insurance, and skill formation.165 Historically, the widening of the franchise and electoral competition is associated with redistributive spending, but the effect

 



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of democratization on increased effort to provide public goods such as clean water, paved roads, electric power, public schools, hospitals and clinics, parks and many other services and amenities is a much more powerful equalizer of opportunity. Restricting political rights relieves a regime of such pressure and encourages it to target its resources on those who support it. This point helps explain the often-​noted bias in education spending in many developing countries toward tertiary over primary and secondary education.166 Likewise, when the provision of public goods can be privatized as part of a liberalization policy, government can award the contracts to those particular firms that support it and ensure that the benefits are narrowly targeted. The rent streams generated by privatizing the supply of public goods following a market opening in a communist country create sources of revenues for firms that support the government, often shared with their friends in government in the form of campaign contributions, kickbacks, and bribes. In the most recent period, both Russia and China have diverted redistributive tensions by adopting an expansionist foreign policy and dismantling the last remaining constraints on the leader’s power. Both leaders have altered the rules of succession in order to continue in power. Just as Putin pushed through constitutional amendments in March 2020 that would allow him to seek yet another two terms as president when his current term ends in 2024, so in March 2018, China’s National People’s Congress eliminated the constitutional clause limiting the president and vice president to two five-​year terms. This move was widely interpreted as a signal that Xi intended to stay on as general secretary beyond two terms, in view of the fact that general secretaries usually also simultaneously hold the position of state president. Both leaders also have tightened the center’s fiscal control over regional governments, increased reliance on SOEs to serve as “national champions” and engines of growth, suppressed any potential opposition, shut down many nongovernmental organizations, and tightened political control over the mass media.167 Xi Jinping took full control over Hong Kong; Putin annexed Crimea and invaded Ukraine. These developments may not have been inevitable, but in both cases the trajectories served the political interests of the oligarchic alliances the regimes rest on. An expansionist foreign policy serves the purpose of justifying centralization, mobilization, and personalization of state power. For that reason, the evolution of both regimes from market liberalization to the suppression of democracy, the progressive narrowing of market competition, and the turn to aggression abroad make them not only a cautionary tale for the United States, but a threat to our national security. The alliance of wealth and power in both countries arose from the form that market liberalization took, which allowed the early winners to capture the benefits of a partial market opening and then to lock them in through mutually beneficial exchange relations with the rulers. Both sides in this exchange are

 

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threatened by the prospect of democratization. Not only does democratization raise the possibility of a full-​scale redistribution of wealth, but it would also lead to expanding the provision of public goods and services and major reforms of the tax system. If reform opened up the economy and political system to competition, in both economic and political arenas, it would deprive rent-​seekers of their monopolies over profitable services. Freer political competition, like freer market competition, makes it difficult for officeholders to deliver favors to the concentrated wealth-​holders that keep them in power. This common stake in maintaining economic and political inequality motivates each side to cooperate in preventing threats to their power. Therefore the consequence of the ties binding them—​corruption, cronyism, an ideology putting big business’s interests ahead of the public interest—​is the denial of claims by citizens to full and free exercise of equal political rights. The parallel cases of Russia and China vividly illustrate the point that democratization poses a serious danger to a regime whose political core is an oligarchic alliance of wealth and power. The partners in that alliance can suppress the threat, at least for a time, by stifling equality of political rights. When liberalization drives high economic inequality, therefore, it narrows the potential social base of support for democracy. The German case, detailed in the next chapter, lends support to the corollary idea: that if liberalization produces growth with relative equality in the benefits and costs of growth, it reinforces democratic institutions.

 

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The Social Market Economy in Germany

In Germany, the policies of economic liberalization after World War II brought about sustained prosperity without fueling extreme economic inequality. In this chapter, I seek to explain why. I argue that Germany sought to create, and has largely succeeded in maintaining, an open and competitive economy in a pluralistic society where the burdens and benefits of growth have been widely shared across society. Certainly Germany has not avoided economic inequality or social conflicts, but the distribution of income and wealth is much more equal than in the United States, Russia, and China, and its democracy is more resistant to the threat of extremism than that of the United States. Much depends on our point of reference. When we compare Germany to the communist countries that dismantled the institutions of a planned, centralized economy and undertook major programs of economic liberalization, Germany’s record is striking because it has achieved high prosperity, relatively high equality, and robust democracy. Germany’s economic and political performance is comparable to that of other rich northern European democracies that did not dismantle totalitarian regimes; its level of inequality is somewhat higher, as is its level of prosperity, and its political institutions are healthy. And by comparison with the United States since the late 1970s, Germany’s performance is superior in both economic and political terms. By no means has Germany solved all the problems it faces, but in sharp contrast to the transitions in Russia and China, and the liberalization in the United States starting in the 1970s, its economic evolution since the collapse of the Hitler regime has worked to strengthen democracy rather than to strangle it.

The Returns to Power. Thomas F. Remington, Oxford University Press. © Oxford University Press 2023. DOI: 10.1093/​oso/​9780197685952.003.0009

 

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9.1.  Prosperity for All? The Federal Republic of Germany’s first postwar economics minister, Ludwig Erhard, often declared that the goal of his policy was to establish “prosperity for all.” Has Germany succeeded in achieving that goal? The answer is clearly yes. The data show that since the end of World War II Germany has enjoyed high economic growth rates and that economic growth has benefited all strata of the population. Over the past 70 years, Germany’s mean national income grew faster than the United States, France, Italy, the United Kingdom, Sweden, Denmark, and the Netherlands, although more slowly than China. See Table 9.1. Mean annual household gross income in Germany in 2018 reached €58,152, or about $68,619 US at the 2018 exchange rate of €1 =​$1.18. After taxes and transfers (which are about a quarter of mean gross income), the mean was €43,932 (or $51,840). Because prices are relatively high, the purchasing power parity (PPP) value of a euro is only about 80% of its equivalent exchange rate value of a US dollar. Therefore, the mean household post-​tax income is roughly equal in purchasing power to around $41,470 in the United States. As I have argued, though, mean income figures conceal how incomes are distributed, and the greater the level of income inequality in a country, the more misleading they are. Therefore it is more informative to compare median household incomes and to examine the ratio of median to mean incomes. Germany’s Table 9.1: Compound Average Annual Growth Rate, Mean National Income, 1948–​2021, in Constant €2021, Selected Countries China (1979–​2021)

5.24%

Germany

2.62%

Sweden

2.34%

France

2.12%

Italy (1950–​2021)

1.90%

Denmark (1950–​2021)

1.89%

Netherlands (1950–​2021)

1.89%

United States

1.74%

United Kingdom

1.68%

Russia (1991–​2021)

0.57%

Source: WID World.

 



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median disposable household income was about €39,400, equivalent to about $37,194 in PPP terms. By contrast, in the United States, mean household post-​ tax and transfer income in 2019 was $98,088 and median income was $68,703. In the United States, therefore, the gap between mean and median income is substantially greater than in Germany: about 30% in the United States as compared with 20% in Germany.1 Chapter 2 noted that aggregate inequality trends are the joint product of the movements of incomes at the lower end and at the top of the distribution, and these can follow different trajectories. In the United States, low-​end incomes have grown much more slowly than top-​end incomes over the past 40 years. For the United States, as in Russia and China, overall income growth has favored those at the top much more than those at the bottom. In Germany, incomes at the top have risen more quickly as well, especially since 2000, but inequality has not reached American or Russian levels. There are several ways to see this. The World Inequality Database (WID) figures show that Germany’s top 1% now receive a share of pretax national income roughly at the same level of that of the United Kingdom, although the tax system redistributes substantially from pre-​to post-​tax income. The figures for Russia and China need to be treated with considerable skepticism, for reasons noted in Chapter 2. (Among other things, a great deal of the top-​end income in Russia and China goes unreported.) The same is true for the United States, given the high share of unreported income received by the top income groups.2 Therefore the German figures probably understate top-​end income far less than do those from the other three countries. (See Figure 9.1.) The top 1% share in Germany is similar to that of the UK, higher than those of the Netherlands, France, Sweden, and Italy, and lower than those of Denmark, the United States, China, and Russia. A useful measure of inequality in income is to compare trends in in mean income growth with median income growth, both on a pretax and post-​tax basis, and the ratio between top-​end incomes and bottom-​end incomes, specifically the ratio of incomes at the 90th percentile to those at the 10th. The median-​ to-​mean ratio indicates how great is the spread of incomes at the top, since the mean income is pulled upward by the extremely high incomes at the very top. As Chapter 2 emphasized, the median income conveys information about the incomes of those in the middle of the distribution, regardless of the spread of incomes above and below it. When the median income is closer to the mean, there are fewer extremely high-​income people in the highest brackets. In the United States, the ratio of median to mean income has fallen sharply since the late 1970s and has now reached 72%.3 Figure 9.2 shows the trends for Germany, using post-​tax and transfer figures from the OECD.

 

Top 1% share of pretax national income, 1948-2021 .25

Top 1% pretax income share

Russia

.2 USA

.15

China UK, Germany

.1 France, Sweden

.05 1940

1960

1980

2000

2020

Source: WID World NB: Russia since 1990, China since 1978

Figure 9.1:  Top 1% Share of Pretax National Income, 1948–​2021, Selected Countries Germany and US: 2 measures of income inequality median to mean income ratio (left axis) and ratio of 90th to 10th percentile (right axis) 7 Median: mean, Germany

p90 : p10, US 6

5

.85 Median : mean, US

4 p90 : p10, Germany .8

3 1970 1980 1990 2000 2010 Source: OECD [https://www.oecd.org/social/income-distribution-database.htm]

2020

Figure 9.2:  Two Measures of Income Distribution, Germany and United States, 1971–​2019

p90 : 910 ratio

Median: mean income ratio

.9

 



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The median-​to-​mean ratio for household disposable income in Germany is well above the United States’, and has recovered somewhat since reaching a low point in 2010. Likewise its 90:10 percentile ratio (i.e., the ratio of the income of the 90th percentile of income-​receivers to the 10th) is much lower than the United States’. Although estimates of income shares are more useful than the Gini index, particularly when they are constructed using administrative data from tax and other records, even these can be misleading, because income differences between the top and bottom brackets can vary widely across countries. In Germany, households at the 90th percentile receive 3.8 times more in post-​tax, disposable income than those at the 10th, whereas in the United States, the gap is 6.2 times.4 The difference reflects the far wider distances separating income groups in the United States. The ratios of those at the 99.99th percentile to those at the bottom are commensurately higher in the United States, where, as we have seen, the gradient of Income inequality rises steeply at the top. Therefore, using the 90th percentile as a threshold fails to measure the extreme concentration of income at the very highest end of the distribution, which is much higher in the United States than in Germany. The distribution of incomes differs according to whether we consider pretax and transfer or post-​tax and transfer incomes. For a country such as Germany, with very substantial redistributive mechanisms, post-​tax income distribution differs substantially from pretax. My own calculations from Germany’s household income data—​which are based on a detailed household survey rather than tax records—​suggest that the redistributive effect of German tax and social support policies has ensured that the post-​tax and transfer income share of the lower half of the income distribution has remained at roughly 30% in both western and eastern Germany.5 (See Table 9.2.) It has also kept the post-​tax and transfer income share of the top decile at about 20%–​25% from a pretax share of around 30%. (The corresponding figure for the United States is around 33%, and the pretax income share is around 45.5%.)6 German scholars have recently called attention to the fact that inequality in the distribution of wealth is high and may be growing. The Global Wealth Report from Credit Suisse Bank indicates that the Gini coefficient for the distribution of wealth in Germany was 81.2 in 2000 and fell to 77.9 in 2020. The top 1% owned 29.3% of wealth in 2000, 29.1% in 2020.7 The WID World data put the top 1% wealth share at 26.3% in 1995, 29.7% in 2021. Other estimates show considerably higher wealth concentration. By combining household surveys, including a special-​purpose survey designed to oversample high-​wealth households, with figures interpolated by using Pareto estimates derived from the rich lists published by Manager magazine (similar to the rich lists published by Forbes), German scholars have estimated that the top 1% holds as much as

 

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Table 9.2: Income Shares, Pre-​and Post-​tax and Transfer, by Income Group, West and East Germany West Germany

East Germany

1995

2005

2015

1995

2005

2015

Bottom half share 22.98 (pretax)

18.23

17.90

21.54

12.37

12.74

Bottom half share 25.16 (post-​tax)

30.41

29.94

24.69

32.37

30.58

Top decile share (pretax)

31.30

28.26

28.79

33.08

29.41

30.20

Top decile share (post-​tax)

21.22

24.15

23.43

19.83

22.94

21.57

Source: Calculated from Socio-​Economic Panel (SOEP), data for years 1984–​2017, version 34, SOEP, 2019, https//​:doi.org/​10.5684/​soep.v34. Pretax and post-​tax measures take into account transfer payments to households such as social assistance, unemployment benefits, and pensions.

35% of total wealth.8 German taxes on wealth, especially real estate, are light compared with many other countries, whereas the taxes—​including social insurance contributions—​on labor are relatively high. Because accumulated wealth becomes a major source of the reproduction of inequality across generations, Germany’s relatively high wealth inequality is one reason for the relatively low rate of social mobility. Some experts therefore call for higher real estate and inheritance taxes to counter rising wealth concentration.9 On the other hand, the accumulation of wealth at the top in Germany, if it is growing, is growing much more slowly than in the United States, Russia, and China. Another indicator of whether prosperity is widely shared is poverty rates. Taken by themselves, these tell us relatively little about the depth of poverty or how many households live in extreme poverty. Moreover, the threshold level for measuring poverty can vary across countries, depending on whether we use relative or absolute measures. Measures of relative poverty and relative deprivation convey different information than do measures of absolute poverty. Relative poverty reflects not just whether a household can afford basic necessities, but also whether a family can live in dignity and fully participate in society. Relative poverty in Germany is high, whereas absolute poverty is low. Germany takes as its benchmark of relative deprivation a family income below 60% of the median, a comparatively high standard. By that measure, 16.5% of households faced poverty in 2016. If the line is lowered to half the median, the share was 9.7%. By the more stringent absolute standard of “severe material deprivation,” 3.7% of

 



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Table 9.3: At Risk for Poverty in Germany, by Post-​tax and Transfer Threshold and Age, as Percentage of Population (2016) Relative to median

All

Age 65+​

< 70%

24.3

27.7

< 60%

16.5

17.7

< 50%

9.7

9.4

< 40%

4.8

4.0

“Severe material deprivation” (erhebliche materielle Entbehrung)

3.7

2.7

households were in poverty. Compare this to the number of households in the United States with incomes below the poverty line: 10.5% in 2019, down from 14.8% in 2014. But the US poverty line is low, less than a third of median household income for a three-​person family.10 In other words, although Germans express concern about high poverty rates, they are using a much higher threshold for measuring poverty than is used in the United States. Table 9.3 shows the German figures by different threshold measures.11 Another dimension of well-​being is income security over a lifetime. In the United States, a household’s risk of a sharp drop in income from unemployment or health crisis has risen significantly in recent decades as the social safety net has weakened.12 In Germany, the policies and institutions fostering shared prosperity have brought a high level of income security. Old-​age income benefits and health insurance are universal and are funded mainly through employment-​ based contributions supplemented by public budget funds. Below I will discuss Germany’s social welfare system in more detail. Suffice it to say here that it affords households greater lifetime security than is the case in the United States.

9.2.  The Social Market Economy Paradigm Considered in a comparative perspective, Germany’s social market economy has produced shared prosperity. The system has withstood stresses that many expert observers predicted would lead to stagnation or crisis. Germany has succeeded in preserving the institutional framework forged in the first years of the postwar period and maintaining an economy that is fundamentally stable, with broadly shared prosperity and a firmly grounded democracy. Germany is by no means the only country in Europe to feature a high overall living standard with little

 

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inequality, but because it reconstructed its economic system after dismantling the centralized, cartelized, mobilization-​oriented Nazi economy, it warrants particular attention. The paradigm established in the first decade of the postwar period was liberalizing, not only by contrast to the Hitler period, but also when compared with the Keynesian policy packages adopted in Britain and elsewhere. However, the Federal Republic also incorporated other, nonliberal institutional features into its liberal framework. The resulting amalgam represented a “policy paradigm” in the sense in which Peter Hall defines the term: a major change of course entailing not only a shift in the policy instruments and operating procedures of government, but a significant alteration in the basic hierarchy of policy goals as well.13 Policy paradigm shifts of such magnitude are rare. Hall cites as an example Britain’s turn from the Keynesian expansionist policies of the postwar era to Thatcher’s monetarism and liberalism beginning in 1979 and the shift in policy paradigm toward liberalization occurring at the same time in the United States under Carter and Reagan. Similarly, I treat the market transitions of Russia and China as paradigm changes. In each case, the new paradigm shaped the direction of subsequent economic and political development for a lengthy period. The Nazi regime established extensive state control over economic production and distribution through the system of mandatory cartels for big business and controls on wages and prices. Income inequality increased, in part because taxation was nonprogressive. Labor paid a higher share of income in taxes than did the wealthy because the largest share of tax revenues came from labor rather than capital. By the late 1930s, the share of tax revenue paid by labor rose faster than did the share paid by propertied groups. As a consequence, income inequality rose under Hitler.14 Big business cooperated with the Nazi regime, benefiting from wage suppression, the elimination of collective bargaining, and the boom in state investment in weaponry. One historian characterized the system as “organized capitalism effectively assisted by the state.”15 The Federal Republic replaced this paradigm with one that was fundamentally liberal. The most dramatic move toward liberalization was the lifting of price controls and rationing in 1948. More generally, however, Germany’s first postwar government replaced regulatory controls as much as possible with a market-​driven, price-​based system of resource allocation. To the extent that Allied pressure permitted, the government assigned priority to price stability and the protection of competition in the marketplace. But these liberalizing measures were coupled with others that are normally considered incompatible with liberalization, such as the reliance on corporatist forms of labor-​employer inherited from earlier periods of German history, Bismarckian employment-​based social insurance, and social justice principles from Catholic social teaching.16 Germany also imposed a sizable tax on wealth.

 



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Called the “equalization of burdens” tax (Lastenausgleich), and adopted in stages, the move provided compensation to those who had lost their fortunes as a result of the war while imposing a flat 50% tax on the wealth of households whose fortunes had survived or even grown under the war.17 The wealth tax, combined with the impact of the destruction and devaluation of assets, significantly reduced wealth inequality.18 The new system was also shaped by concessions to the occupying Allied powers and to powerful domestic lobbies (particularly the mining, iron, and steel industries with their history of cartel arrangements), pragmatic bargains struck between owners and employees, compromises between competing wings of the Christian Democratic–​Christian Social Union coalition, and electoral pressures. The end of four-​power Allied cooperation in occupation policy—​marked above all by the Soviet withdrawal from the Allied Control Council in March 1948, which resulted in the breakup of Germany into Western and Soviet-​ occupied zones and spurred the merger of the French occupation zone into the US-​British Bizonia—​also deeply affected the early political and economic design.19 So did the construction of a socialist economy in the Soviet-​occupied Eastern zone, which offered an alternative economic model. The desperate shortages of basic consumer goods and raw materials in the first few years, and external stimuli such as the outbreak of the Korean War, prompted further adjustments in policy. Likewise, the early steps in planning for Marshall Plan assistance and for creating the Coal and Steel Community required policy innovations, some of which proved lasting. Germany has continuously adapted its institutions to circumstances, both external and internal. Although Germany is often characterized as a “coordinated market economy,” or CME its coordinating institutions serve to reinforce rather than to undercut the liberal character of its economy.20 Moreover, Germany’s system has continuously evolved.21 Parameters of the social insurance system have been adjusted upward and downward, and new categories of beneficiaries have been incorporated into it. Government fiscal priorities have changed. Collective bargaining between labor and employers has become much less centralized even as it has continued. The role of the Mittelstand—​the crucial sector of small and medium-​ sized firms that help ensure Germany’s continued economic viability—​remains vital, but Mittelstand firms have changed in important ways, with family-​owned firms, for example, giving way to foreign ownership. Structures of corporate governance and corporate finance have evolved. The long-​standing two-​and-​a-​half-​ party system has given way to a much more fluid constellation of parties. Constant adaptation of basic principles has been shaped by learning, circumstances, and changes in the balance of political power and interest. Yet the liberal core of the economy and political system has persisted. Germany’s vigorous enforcement of competition law; its commitment to a

 

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stable currency; its concern with the viability of the small and medium-​sized enterprise sector (the “Mittelstand”); and its openness to foreign trade and investment, are a lasting legacy of the liberalizing principles of the postwar paradigm. They are reinforced rather than undercut by the similarly high priority given to public goods: coordinated joint investment in skill formation, R&D, quality infrastructure, information provision, transportation, education, and health care, as well as by the extensive system of broadly pooled social insurance. In the political arena, it is notable that no ruling group has mounted an assault on the political rights of its opponents. German liberalization never permitted business or government to sabotage workers’ rights as it did in the United States. In fact, an underappreciated reason for Germany’s success in maintaining price and currency stability is its use of bargaining between business and labor as a means to avoid inflationary wage-​price spirals. This is one reason that, apart from a brief period in the late 1960s, interest rates have never risen to the extreme heights reached in the United States and Great Britain. Erhard believed that only price stability could ensure that capital investment maximized productivity, but he was by no means a monetarist.22 Rather, he believed that mutual restraint by business and labor in wage and price demands, and an equitable sharing in the fruits of economic growth achieved through collective bargaining, would prevent inflationary pressure from overburdening the central bank’s tight monetary policy. Therefore, the corporatist elements adapted from earlier periods of German history could be reconciled with the liberal policies enforced through monetary and fiscal policy by being made to serve them. Moreover, and very importantly, social policy has had a strong investment orientation aimed at raising productivity by raising the level of human capital, in addition to being a means to compensate for market failures. Full employment was another fundamental goal of the social market economy, to be achieved not by Keynesian expansionary spending but by ensuring the conditions for broadly shared market-​led economic growth and shared investment in human capital Therefore, Germany’s system of social partnership has played a major role in preserving price stability, pluralistic competition, and a relatively balanced distribution of incomes. While affirming the social partnership principle in its rulings, the Constitutional Court has also protected individual rights. It has outlawed extremist parties in order to preserve the democratic constitution and banned a broader range of extremist speech than has the United States. Property rights are honored but not treated as an absolute value. The constitution in fact enshrines the principle that property owners bear an obligation to society for the use of their property and the Constitutional Court has enforced the provision (“Eigentum verpflichtet. Sein Gebrauch soll zugleich dem Wohle der Allegemeinheit dienen” [Property obliges. Its use should also serve the public good]).23 The

 



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chamber system that obliges firms to join business chambers and through them to coordinate around standard-​setting, vocational training, and marketing has remained an essential feature of the system. The guiding principles that Erhard and the liberals around him brought into government—​that the government must protect market competition as a positive good in itself because competition guaranteed economic freedom; price stability; social justice through “prosperity for all”; and political democracy protected by preventing any concentration of market power that could suppress political rights—​have remained foundational to the present day.

9.3.  The Ordoliberal Contribution The postwar government called its paradigm the “social market economy.” This term continues to serve both as aspiration and reality. The formula joins two competing vectors of policy, liberal and redistributive. The degree to which Germany’s economic system should or does lean one way or the other has been fiercely debated from the earliest days of the Federal Republic. The tension ­between these two principles has enabled Germany to make continuous incremental adjustments by making modest moves in the direction of one pole or the other of the continuum. As Alfred Müller-​Armack—​Erhard’s associate in government who coined the term—​wrote: “The ideals of freedom and social justice can indeed be linked together on the foundation of the market economy.”24 Müller-​Armack in particular was influenced by Catholic social teachings, which complemented the ordoliberals’ insistence on the need to protect economic competition and individual liberty. Today such thinking may seem unexceptional, incoherent, or perhaps characteristic of a “European-​style socialist” ideology. It is neither. The framers of the German postwar economy were offering a fundamentally new set of political-​ economic principles. Their concern was not that capitalism would lead to crises of overproduction followed by crashes; they adamantly opposed socialism and central planning; with equal vehemence they insisted that both economic and political freedom required the government’s adherence to certain constitutional principles linking social and economic policy. The postwar German government followed a specific variant of liberalism, called ordoliberalism. Some historians consider German ordoliberalism decisive in shaping policy; for others, it was largely incidental—​a rationalization at best, an obfuscation at worst. I believe that the doctrine did have substantial influence, although it was never as comprehensive or as binding as it is sometimes supposed to be both by its champions and its detractors. The awkward name “ordoliberalism” was something its theorists devised themselves in

 

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1948. Ordoliberal principles then were married to a conception of a state that guaranteed basic well-​being of all, to which the broad umbrella term “social market economy” was applied. The social market economy was a well-​chosen term: it was politically acceptable to a broad range of interests in society, it was unencumbered with policy specifics, and it could serve as a focal point for building political consensus. Although the concept of the social market economy was open-​ended, it was not meaningless. For its designers, the task of the social market economy was to reconcile an open, competitive, market economy with a commitment to social justice, a government strong enough to enforce these principles yet one whose power was shared with the federal states, with an independent Constitutional Court and central bank, and with major social associations.25 The ordoliberals believed that economic freedom and economic growth must serve basic values of freedom, equality, and justice. They argued that market freedom must be protected by government, but government must also ensure that all sections of society benefit from its fruits. Competition must underpin freedom for individuals in both the economic and the political arenas; government must work to prevent the accumulation of private power that would threaten freedom. Therefore, for them there was no essential contradiction between liberalism and social justice. Both the nature and the impact of ordoliberalism continue to provoke debate.26 I think the best way to understand ordoliberalism as a philosophy is to consider it a 20th-​century branch of classical 19th-​century philosophical liberalism, with Austrian and Chicago versions of laissez-​faire libertarianism representing a different branch.27 We must recognize the difference and avoid treating either the ideas associated with the ordoliberals or the policies over which they had some influence in shaping as neoliberalism.28 Certainly the ordoliberals themselves rejected neoliberalism as a label.29 As Walter Eucken—​ one of the founders of the ordoliberal school—​put it, “The term ‘liberalism’ or ‘neoliberalism’ is sometimes applied to my ideas, but it is a poor fit.”30 Although they had strong ties to Hayek and other classical liberals (“paleoliberals” or “Stone Age liberals,” as the ordoliberals sometimes called them), the ordoliberals insisted on treating capitalism as inseparable from the social and political environment in which it operates.31 It generates power inequalities that can threaten both political and economic freedom. For this reason, the ordoliberals insisted that laissez-​faire is not the same as full competition.32 They did not elevate economic freedom above political freedom. Rather, the ordoliberals advocated firm government protection of market competition. Ordoliberals argued that competitive markets must be embedded in a constitutional order; otherwise monopolies would join hands with dictators. Rent-​seeking would be inevitable if market agents thought they could win government administrative support

 



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for restricting market rivals. Not efficiency, but fairness and freedom, were ordoliberalism’s foundational principles. Ordoliberalism originated in the 1930s at the University of Freiburg, Germany, among a group of legal and economic scholars appalled by the spread of cartels and trusts throughout the capitalist world, the establishment of state socialism in Russia, and the antidemocratic impulses that accompanied both.33 We must remember that Germany, more even than other capitalist countries, was completely dominated by cartels. There were as many 2,500 of them in Germany by 1925, controlling 100% of coal production, around 90% of steel, and with similar levels of control over many other branches of industry.34 Their defenders claimed that they stabilized capitalism against the threat of ruinous overproduction leading to crashes, but their opponents saw them as harmful to both political and economic freedom (raising barriers to entry for small businesses, for example, and wielding power over government). In the Nazi period, Hitler forced all big businesses to join cartels.35 It is often forgotten that cartels and trusts were—​and often still are—​ defended by authoritarians of both the Left and the Right. On the left, such disparate socialists as Eugene V. Debs, Rudolf Hilferding, Vladimir Lenin, and Nikolai Bukharin admired centralized capitalist trusts and monopolies. They were fascinated by the idea that capitalism had entered a phase in which finance had merged with large industrial corporations to create a centralized organizational machinery that could be taken over as the foundation of a socialist economy: as Lenin put it, “State capitalism is something centralized, calculated, controlled and socialized, and we lack this.”36 The Bolsheviks saw socialism as the consummation of “organized capitalism.”37 But the giant monopolies and trusts have also been also celebrated by fascists, Nazis, and latter-​day antisocialists such as Ayn Rand.38 When Rand attacked antitrust as a fundamental assault on economic freedom, she wrote: If I were asked to choose the date which marks the turning point on the road to the ultimate destruction of American industry, and the most infamous piece of legislation in American history, I would choose the year 1890 and the Sherman Act—​which began that grotesque, irrational, malignant growth of unenforceable, uncompliable, unjudiciable contradictions known as the antitrust laws.”39 For Walter Eucken, ordoliberalism offered a market-​oriented alternative to central planning and administrative control over allocation and to pure laissez-​ faire capitalism. So long as competition guided the operation of the price mechanism, the market would coordinate the economic activity of agents and create order. A constitutional foundation for such a market-​based, price-​based

 

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coordination of society was required in order to protect competition from large private or public concentrations of market power.40 Eucken distinguished between administratively controlled and market-​driven economies.41 In the first, the allocation of resources was determined by administrative authority, as in a planned economy or within a bureaucratic organization. In the market-​driven economy, prices served to signal relative scarcities of resources and relative demand for goods and services. These price signals guided the decisions of producers and consumers. The mechanism for coordinating economic activity was therefore fundamentally different between the administratively controlled and market-​driven economy: the first required decision-​making by a planner, whereas the second allowed the autonomous and independent choices of the many individuals making up the economy to determine how resources would be used. Although these ideas seem largely self-​evident now, for people in the 1930s they were anything but axiomatic. Observing the constant crises of overproduction followed by crashes that dogged capitalist economies, many believed that the rise of giant trusts, cartels, and corporations represented the apotheosis of economic rationality. For the radical Left, the communist revolution in the Soviet Union appeared to have solved the problems of capitalist overproduction, inequality, and waste through a system of central planning and state control. Some thinkers believed the future lay in corporatist forms of social organization, where giant syndicates of labor and capital would coordinate prices, wages, and social policy. Conceptual clarity such as Eucken’s was therefore a rare achievement. Needless to say, the fact that he was an anti-​Nazi and writing under Hitler’s dictatorship, at a university where the rector, philosopher Martin Heidegger, was busy imposing his own Führerprinzip and a pro-​Nazi ideological climate, makes his scholarly contributions that much more impressive. Eucken moved to take up a position as professor of economics at the University of Freiburg in 1927 and remained there until he died in 1950. During the Nazi period, he resisted Heidegger and fought to ensure that the economics faculty retain a measure of intellectual autonomy.42 It was at Freiburg where Eucken met Franz Böhm, who was then working in the Weimar government ministry trying to regulate cartels. The two shared a strong antipathy against the power of cartels and concentrations of market power generally. An economist devoted to grounding economic theory in historical evidence, Eucken was aware of how hard it was for governments to check the abuses of monopolists. For one thing, as he noted, “abuse” was itself a vague term (a problem that bedevils antitrust litigation to this day). For another, corporate entities will gain substantial influence in the state. For that reason, the state must act to prevent the rise of entities with market power, not fight them after they have grown too powerful: “It is not in the first instance against abuses of existing power bodies that economic

 



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policy should be applied, but rather against the rise of power bodies altogether. Otherwise, it will have no chance to solve the problem. This is a point of fundamental significance.”43 His colleague, Franz Böhm, declared that society must not put the principles of the freedom of contract and rights of property ahead of the freedom to compete: Jus publicum privatorum pactis mutari non potest (a public law cannot be changed by private agreements).44 The ordoliberals fought the refusal by many economists to look squarely at factual data. The Freiburg school recognized that economic theories were powerful tools, but did not accept that theories worked independently of their social setting. Eucken insisted that economists take account of historical circumstances in which economic forces play out. This required that economists lift the curtain to recognize the constant struggle of power interests, masked by ideology, often brutal, among concentrated centers of market power.45 The history of the economy, Eucken wrote in 1947, is a history of the abuse of power. And power, he wrote, is power, whether in private or state hands. Power is the antithesis of freedom, which, he argued—​following Kant—​should be the moral foundation of the society; freedom is not a goal in itself but a means to serve “free self-​responsible people.”46 Since concentrated economic power will also gain political influence in the state, and use it to abuse individual rights and freedoms, “It is not in the first instance against abuses of existing power bodies that economic policy should be applied, but rather against the rise of power bodies altogether.” Eucken always insisted that economic and political power were inextricably connected. Over history, state rulers fought to dominate the economies of their countries. Guilds fought against outsiders, consumers, and landowners. The history of economics is a history of the abuse of power, he wrote, although to varying degrees in different economic orders. The key question was who was abusing whom, and how.47 Eucken and Böhm founded the journal ORDO after the war, where they continued to propound ordoliberal ideas. The old Latin/​Roman term “ordo” referred to the idea that the legal framework ensuring market competition and market freedom should be embedded in a constitutional and statutory order to protect market competition and prevent concentrated economic power from encroaching on freedom. The state had an obligation, Böhm insisted, to interfere with the freedom of contract and rights of property when they infringed on the freedom of individual producers and consumers. To protect property in the name of efficiency would establish “the power of the mightier, a commercial right of the fist” (“Etablierung des Rechtes des Stärkeren, eines kommerziellen Faustrechts”). Such a right of the fist of course was precisely what appealed to communists, fascists, and radical libertarians alike. Such thinking repulsed the ordoliberals, who had watched as the Russian Bolsheviks imposed a totalitarian economy on their subjects and as Hitler imposed a mandatory cartel system on Germany

 

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without resistance from industrialists or trade unionists.48 Whether by the Nazis or the Soviets, such monopolistic organizational forms denied freedom in both the economic and the political realms. And while they succeeded in preventing crises of overproduction and mass unemployment, they did not prove their worth either in social justice or in technical innovation.49 For the ordoliberals, therefore, a market economy where the state protected individual freedom by ensuring competition and preventing the rise of concentrated market power before the fact, not after, was the only guarantee both of economic prosperity and elementary social justice. The ordoliberals were influenced by American progressive doctrines holding that giant concentrations of economic power threatened both political and economic freedom, as a 1928 essay by Böhm on private power concentrations makes clear.50 As I mentioned in Chapter 5, as early as 1912, the German economist Fritz Kestner cited Brandeis on the danger of cartels.51 But whereas in the United States, pro-​competition doctrines’ influence faded after the 1970s and was replaced by a single-​minded preoccupation with efficiency as the sole criterion of social well-​being, the ordoliberals’ ideas—​along with other intellectuals and institutional legacies—​influenced the design of German economic institutions following World War II.

9.4.  Ludwig Erhard and the “Economic Miracle” The Federal Republic’s first minister of the economy, Ludwig Erhard, shared some of the ordoliberals’ views and brought both Eucken and Böhm into his government. Erhard was a policy-​oriented economist rather than a theorist. He drew on ordoliberal thinking selectively, basing his decisions on his own judgment about how and when to apply principles to immediate problems.52 Erhard combined a firm set of doctrinal inclinations with a forceful personality, a gift at articulating his thinking publicly, and a pragmatic instinct about when to compromise and when to stand firm. In contrast, ordoliberal theorists such as Eucken and Böhm tended to see policy issues in a more abstract theoretical light. Erhard was recruited by the United States to oversee economic recovery in Bavaria in October 1945 as minister for economic affairs. Later the United States appointed him director of the Office of Economic Opportunity for the US-​British Bizonal administration and adviser to General Clay, US military governor. In January 1948 the United States appointed him to be chair of the new German Economic Council. In June 1948, against American advice, he lifted price controls and enacted currency reform. This was a drastic response

 



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to widespread hoarding, itself driven by widespread anticipation of the lifting of price controls.53 The end of price controls led to an immediate contraction in the money supply—​but money had lost all value. Many predicted ruination. And for the US occupation authorities, ending price controls would mean ending Allied control of the economy.54 Then the USSR pulled out of the Allied Control Council, allowing the United States to back the introduction of a separate currency in the Western zone. Lifting price controls and rationing produced an enormous psychological shock, but as production rose and shortages shrank, public opinion grew increasingly favorable to Erhard’s policies.55 For Erhard, the immediate burst of production brought about by price liberalization confirmed the validity of his ordoliberal views, although certainly the Korean War also served to boost industrial production starting in 1950. In the immediate aftermath of the war, shortages were acute, taxes high, and the currency largely worthless. The economy ran on barter. Destruction of industry was not as extensive as many believed ( John Kenneth Galbraith’s strategic bombing survey of damage showed as much).56 However, production was crippled by the breakdown in exchange and destruction of infrastructure. Significant bottlenecks impeded recovery. Germany was not autonomous in policymaking and had to accommodate Allied demands.57 These shifted from demands for deindustrialization in the first years to urgent demands for reindustrialization in the early 1950s, from demands that Germany deconcentrate its industrial cartels to demands to rebuild them, from support for liberal policies to a sharp turn away from them once the Korean War broke out. A memorandum from John McCloy, US high commissioner for Germany, on March 6, 1951, demanded that the government enact “a significant modification of the free market economy” in favor of direct government intervention in production, prices, currency, and planning of priorities in order to serve the needs of Western military effort. Erhard made minimum concessions to this pressure, allowing some cartel-​like coordination in the iron, steel, and mining industries, while continuing to enforce competition in other parts of the economy. English Keynesians watching German developments of 1948–​49 regarded Erhard’s policies and its ordoliberal principles as reckless. An anonymous reviewer of a book by Eucken in the Times Literary Supplement in 1950 referred to Germany’s “policy of decontrol and deflation pursued in that country which resulted in mass unemployment and a degree of social inequality unparalleled even under the Nazis” and, most damningly, that Eucken’s thinking “completely falls to the ground for use at British universities.” Thomas Balogh, later Harold Wilson’s economic adviser, spoke of the “iniquitous new German economic and social system. . . . in the long run this income pattern will become

 

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intolerable and this productive pattern unsafe.” Once necessary reform can no longer be postponed and a new productive system put in place, “A serious crisis and terrible social costs will be inevitable.” Erhard’s government was trying to undermine “enlightened Keynesian economic policy.” By relying on outdated, erroneous theories, it “tried to apply to real life an abstract, obsolescent and internally inconsistent economic theory and certainly did not succeed.”58 Other observers take an entirely different view, believing that ordoliberalism had little or no influence on German policies or that it did, but in nefarious ways. One Dutch scholar argues that “ordoliberalism as a form of neoliberalism was rather insignificant at the time.” Instead, Germany, like the European Union, has taken a “permissive approach towards economic concentration” to sustain “Fordist accumulation structures by means of large corporations.”59 A German economist holds that ordoliberalism was something of a conspiracy, a variant of laissez-​faire liberalism that was steeped in antidemocratic, authoritarian, Nazi-​ inflected, antimodern, patriarchal, and Eurocentric values. In the view of these critics, the concept of the social market economy was largely public relations; its acceptance of the need for political pragmatism was simply incoherent and opportunistic.60 Other writers have treated ordoliberalism as statist and technocratic.61 Recent research by the British historian Kenneth Dyson has shown that this line of criticism is not warranted by the record; Eucken’s papers, for example, reveal that he regarded ordoliberal thought as part of the history of intellectual resistance to tyranny. On the eve of Hitler’s ascension to the chancellorship, Eucken wrote pointedly against his rise. In 1932, Eucken warned against a dictatorial state that sought to become “a substitute for religion.” He believe a strong state was needed precisely in order to protect individuals against oppression by private or public concentrated power.62 In fact, the ordoliberal influence on Erhard’s policies is ambiguous. The main ordoliberal thinkers themselves were divided over some of the major policy issues, including the concept of the “social market state” and the state’s role in providing public goods. Erhard was selective and pragmatic in his use of economic doctrines. Ordoliberalism was therefore only one of several influences on his policies. Still, it was under Erhard that the ordoliberal philosophy had its maximum impact on government policy. In 1966, the government changed hands and the Social Democratic party formed part of a grand coalition. The economics minister was social democrat Karl Schiller. Although the new government retained many of the initial institutional choices made by the CDU government, it introduced a number of policies drawn from Keynesian theory. CDU leaders saw their program as building on, not overturning, the paradigm established in the first two decades. As the Karl Schiller put it, their vision was a “synthesis of Freiburg imperative and Keynesian message” or a “magic triangle” that

 



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“incorporated concepts of the Keynesian model, the Freiburg school, and the neoclassical synthesis for economic policy decisions.”63 Although there were strong complementarities across institutional domains in those first two decades, it is mistaken to imagine that the system established in that early period formed an institutional equilibrium.64 A case in point is the law protecting competition, a high priority for the ordoliberals. Ordoliberal theory rejected the idea—​which became a cornerstone of American conservatives’ understandings of liberalism—​that a one-​sided accumulation of market power by big business ipso facto reflected superior market efficiency. They therefore opposed the concentration of power in the large industrial associations. However, German industrial associations were extremely powerful, and once the United States demanded that Germany rearm and rebuild in order to counter the threat of Soviet power, their influence was reinforced by American pressure. Initially, however, the United States opposed the industrialists’ demand for exemptions from any anticartel legislation. Erhard skillfully fended off both sides, playing them off against each other.65 A fierce debate over the details of the competition legislation continued from 1950, when the first draft of the law was written, until its enactment 7 years later.66 When the Korean War began, the United States demanded that Erhard turn away from his liberal principles and accept coordination by heavy industry over allocation of raw materials in order to facilitate German reindustrialization and rearmament. Erhard worked to make the narrowest concessions to this pressure as was politically feasible. It is not the case, therefore, despite some historians’ interpretations, that German antitrust law was based on American antitrust, or, to the contrary, that Erhard privately supported the industrial lobby’s demands for restoration of its former power. One German scholar’s judgment appears sound: The main contribution of American influence was in promoting [gefördert] ordoliberal concepts. The transatlantic support led to a decided shaping of the competition principle. . . . It was not the individualistic approach of the antitrust law [of the United States], but the German roots of the ordoliberal concept of order and the common good [Gemeinwohl] that remained formative.”67 An American historian has argued that American influence on the German competition law was a “catalyst” that allowed the indigenous traditions associated with ordoliberalism to reassert themselves.68 As he points out, there were important differences in the intellectual cultures of the German and American legal traditions—​ the American was far more individualistic, the German far more societally based. Germans recognized that competition law always

 

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concerned contests of power, not just efficiency. The thesis that the German focus on competition as a positive good in own right for a free society reflects Americanization is also refuted by the fact that the American effort to establish a strong antitrust legal framework failed in Japan, where it lacked strong indigenous intellectual roots.69 The final version of the law took effect on January 1, 1958. It did exempt certain industrial groups from anticartel provisions and certainly encouraged collective bargaining by peak associations of social partners. It banned agreements that had the effect of restricting competition as well as any vertical agreements that restricted competition. Enforcement of competition policy by the newly created Federal Cartel Office, while cautious at first, increasingly worked to ensure that firms competed by enhancing quality in an expanding and competitive global marketplace rather than by fixing prices or suppressing rivals.70 Like the competition law, most other major policies—​fiscal and social policy, industrial relations, corporate governance, and others—​have been subject to continuous bargaining and compromise among contending interests. As a result, policy change has been incremental. Its cumulative effect has been to leave the distribution of political resources widely distributed rather than concentrated in one particular alliance. To a large degree, Erhard’s goal has been realized: “to lead ever widening circles of the German people towards prosperity. Determined to overcome the old conservative social structure once and for all, I planned for a broadly based mass-​purchasing power.”71 His vision in fact is strikingly similar to China’s economy in the 1980s and 1990s, as liberal policies allowed the country to achieve economic growth sufficient to allow China to discard planned production targets. That is, in both cases, the objective was to use market incentives to stimulate production, thus raising both output and household disposable incomes to the point at which a rough equilibrium would be reached between demand and supply, and market prices and state procurement prices could converge.72 Although ordoliberal theory was important, Germany’s postwar system was also shaped by circumstances. One of the most important has been European integration, beginning with the adoption of the European Coal and Steel Treaty. The United States strongly supported this treaty both as a means for stimulating economic recovery and as a cornerstone for European integration. Here, too, ordoliberalism played a significant role. The competition law was a crucial instrument for realizing integration because other European countries could accept strong competition law in the European Community as a lesser evil to the potential danger of German future domination of the continent. Competition law has continued to remain a cornerstone of European integration. For this reason, ordoliberalism’s insistence on competition as an intrinsically positive value has become incorporated into the political logic of European integration

 



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even though the specific weight of ordoliberal conceptions in European competition law remains a highly contentious issue for historians.73 Erhard and the United States both supported Jean Monnet in opposing cartels as the basis for restoration of trade. To be sure, the coal and steel industries (which were highly cartelized) saw the European Coal and Steel Community as a step toward restoring traditional markets for products and export cartels as an important means to that end. However, Erhard sought successfully to ensure that cartels remained confined only to iron, coal, and steel. The Marshall Plan also affected Germany’s reconstruction, although in ways that are often not recognized. Certainly the Marshall Plan provided an important impetus to recovery, through direct aid, loan guarantees, investment subsidies, and its effect on reviving foreign trade. But the aid was distributed among 16 countries, and Germany received only 11% of the total, which amounted to only a small share of its national income.74 More important was the American requirement that recipient countries create “counterpart funds” to serve as government-​funded investment capital. Erhard used Germany’s counterpart funds to help ease procurement bottlenecks in iron and steel, coal, transport, and energy. Their use became a form of industrial planning in the 1949–​52 period. Under Marshall Plan auspices Germany also created a development bank—​today known as Kf W (originally the Kreditanstalt für Wiederaufbau)—​ which continues to exist and has played an important role as a source of finance for Mittelstand firms.75 Probably the most important effect was the role of the Marshall Plan as an impetus to unification of the Western occupation zones (e.g., France had to stop taking covert reparations from its zone) and to launch European integration.76 Another crucial circumstance in the first decade was the in-​migration in the 1950s of some three to four million German-​speaking refugees from the East, both from the Soviet occupation zone and from Eastern Europe (such as the Sudeten Germans expelled from Czechoslovakia). Initially they strained the economy’s capacity to absorb them. In surprisingly short order, however, they became a major part of Germany’s labor force. Many were skilled workers, and most became a major source of human capital for the expanding economy in the 1950s.77 Certainly later generations of immigrants, from southern Europe, Turkey, and the Middle East and Africa have not become integrated as readily as the displaced Germans in the first decade. Yet in many cases, latter-​day immigrants also became integral members of German society rather than forming a permanently marginalized underclass. The early 1970s brought new shocks, including the end of the Bretton Woods arrangements that had pegged currency exchange values to gold. This forced Germany to let the mark float upward, jeopardizing the export-​oriented economy. Then the OPEC cartel’s oil price increases injected severe new

 

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inflationary shocks into the economy in the 1970s. These occurred under the Social Democratic government and strained its ability to reconcile price stability with expansionist anticrisis measures. The Social Democrats brought into government a faith in economic steering and the management of growth—​“growthmanship,” in the parlance of the time.78 In the 1967 “law on stability and growth” the government sought to maintain the “conditions for economic equilibrium,” that is, price stability, an export orientation, high employment, and financial accommodation of the economy’s needs—​but all without raising taxes.79 The government expanded social welfare spending and incorporated farmers and professionals into the social benefit system, raised benefit levels, and added new family benefits. The government also enacted efforts to introduce new active labor market policies through training, retraining, placement assistance, and generous unemployment benefits, all to be financed by payroll taxes.80 In the Employment Promotion Law (Arbeitsförderungsgesetz), the government gave workers rights to unemployment insurance in case of employer lockouts.81 The occupational training law of 1969 increased government and employers’ responsibility for investment in training. Faced with a substantial inflationary spike, the government responded with an emergency 10% across-​the-​board surtax in 1970–​71, but this failed to suppress inflation. The Bundesbank tightened monetary policy sharply. Unwilling to accept wage increases, the government supported the “Enterprise Constitution Law” (Betriebsverfassungsgesetz) of 1972 that was supported by the trade unions. This law represented a major overhaul and has been continually amended since then. A crucial feature of the law was to expand co-​determination from the coal and steel industries to all major enterprises. These reforms represented incremental, not radical, change in the social market economy paradigm. For example, the policy program of the Social Democrats in 1976 was called “Weiter Arbeiten am Modell Deutschland” (Work further on the “model Germany”), signaling that they intended to build further on the foundations of a successful economic paradigm rather than to overturn it. Speaking at the party’s congress in 1976, the party’s leaders, Willy Brandt and Helmut Schmidt, emphasized continuity and, although in different accents from the Christian Democrats, rejected the dichotomy between freedom and social security.82 Germany’s “economic miracle” formed the basis for much mythmaking. Neoliberal thinkers such as Milton Friedman used it as evidence for the proposition that radical economic liberalization was the solution to the challenge of reform. As he declared in his two visits to China during the early stages of its reforms, “The so-​called economic miracle produced by Ludwig Erhard in 1948 was a very simple thing. He abolished all price and wage controls and allowed the market to operate while at the same time keeping a strict limit on the total

 



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quantity of money issued.”83 Of course this was a gross distortion. Erhard’s government—​ sometimes over Erhard’s objections—​ retained many of the inherited institutions of the German political economy, including coordination of prices in coal, iron, and steel; collective bargaining; and antimonopoly regulation. Self-​described ordoliberals in Germany, among them Wolfram Engels, a grandson of Friedrich Engels’s brother, echoed these ideas in their meetings with Chinese policymakers, attributing what came to be known in China as the “Erhard miracle” (Aidhade qiji) to radical price liberalization. Some Chinese economists agreed, others did not.84 In the end, China did not pursue radical price liberalization, although, as the previous chapter argued, the policy was more the outcome of contending bureaucratic interests than a chosen strategy. Misreadings of German postwar history are common both among neoliberals, who emphasize Erhard’s bold decision to reform the currency and lift most price controls in 1948 and ignore the rest, and among those who explain German postwar growth as simply another case of “Rhenish capitalism” with strong state regulation and corporatism.85 Both lines of interpretation overlook the combination of economic and social institutions that make Germany’s system distinctive.

9.5.  Evolution of Social Policy Social policy has evolved continuously since the war. The old Bismarckian employment-​based system of social insurance remained in place at war’s end. In 1957, the CDU government made a significant change when it put the old-​age pension system on a pay-​as-​you-​go basis. This move raised benefits substantially and indexed benefits to wage levels. Undoubtedly the timing of the reform was related to the parliamentary elections that were coming up later in the year. Since then, the system of social insurance has retained its foundation of employment-​ based contributions, but over time, budget transfers into the social insurance plans have expanded as poverty assistance and family benefits have been added.86 Most recently the government added a voluntary, government-​subsidized private old-​age insurance pillar to the pension system. In the 1980s, eligibility requirements for old-​age pensions were tightened again, but family allowances were expanded.87 The 1999 pension reform was contentious. The government decided to adjust pension benefits according to actuarial calculations of life expectancy.88 In recent years, the retirement age has been raised further. Pension benefits are not high as a percentage of earnings (about half) but can rise to 70% when voluntary retirement savings are included.89 However, social spending represents a large share of government spending, taking about half of the federal budget and about a quarter of GDP.90 As a share of the federal budget, social spending has been rising, although it is declining as a share of GDP as the economy grows.

 

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Healthcare insurance likewise is based on mandatory employment-​based contributions.91 Nearly all workers are required to enter a health insurance fund. There are multiple funds, some covering particular categories of employment, others local, and others workplace based. The funds are administered by government-​ regulated quasi-​ administrative bodies in which employers and employees have balanced representation. The funds in turn contract with providers. Everyone needing medical assistance can obtain it without incurring out-​of-​pocket fees; there are no personal bankruptcies caused by high medical expenses. A long-​term care insurance pillar was added to the system in 1994. A distinctive feature of labor relations is Germany’s apprenticeship system, called “dual education,” under which schools and firms share responsibility for providing technical and vocational education.92 Dual education has served multiple purposes. As an integral component of economic development, it helps to maintain a highly skilled labor force meeting the needs of a technologically advanced industrial economy. As a mechanism for social integration, it has also proven to be an effective way to integrate young people into the workforce, keeping youth unemployment low. Dual education ensures a close fit between the demands of a dynamically changing economy and the skill profiles of those graduating from educational institutions. To a large extent, dual education systems enable young people to acquire not simply technical skill, but broadly defined competencies that serve as the foundation for rewarding careers and social esteem. With time, fewer young people are entering the system, fewer firms are offering apprenticeship positions, and there is much more movement between the general educational system and technical education and training (although not as much as in a country such as Switzerland, for example).93 Nevertheless, Germany’s dual system has remained a centerpiece of technical and vocational education and training (TVET). Dual education grew out of a long history of guild-​based apprenticeships, class conflict and bargaining, industrial modernization during and after World War II, and multiple refinements in recent decades.94 It rests on a series of partnerships at multiple levels.95 At the national level, business, labor, and government negotiate over the distribution of the costs and benefits of investment in training. At the level of regions, industrial associations, and branch-​based labor unions, the system reflects the delegation of public functions to organizational actors such as industrial-​trade and crafts business chambers that administer and supervise TVET. These organizational memberships resolve collective action dilemmas, particularly coordination among firms over professional standards and training obligations, and those tying firms to state bodies such as education departments and schools. Business chambers play a central role in the dual system. Each chamber has a specialized council for overseeing skill development, and some skills councils oversee multiple professions.

 



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Businesses are required by law to belong to chambers, and in turn they are given substantial responsibility for TVET. The chambers, through their member dues, provide a little over half of the total financing of VET, with government providing the balance.96 Individuals do not pay for their own training. The chamber system ensures standardization of training methods and content, independent assessment of the qualifications of individuals during the course of and at the end of the training period, and provision of a pool of workers with industry-​recognized qualifications. It also helps ensure that the interests of small and medium-​sized firms are not overshadowed by large enterprises. The costs and benefits of the dual education system are thus broadly shared by all firms in a sector. Critically, the chamber system overcomes the temptation for individual firms to shirk from providing training out of fear that other firms will poach their trainees. All firms, large and small, benefit from the existence of a pool of skilled labor in their sector and region. Chambers thus play a critical role as intermediaries among schools, individual employers, government, and individual apprentices. The negotiated compromises among the stakeholders in dual TVET distribute the costs and benefits of training across employers, employees, and taxpayers. Trade unions want to protect their members and ensure that apprentices are not used to displace full-​time workers. Companies want to recoup the cost of training. Under federal guidelines, therefore, companies set the training allowance in rough proportion to the value contributed by the apprentice to production each year. The interests of apprentices are protected through training contracts regulated by the chambers. The system is one of the clearest ways in which social policy is treated as social investment, not only as a compensatory mechanism for inequalities created in the market. The dual education system also illustrates Germany’s success in devising institutional arrangements that mitigate labor-​business conflict. There certainly have been conflicts between workers and employers. A particularly acute episode occurred in 1985 over the rights of workers who were affected by a strike in another region, which became a bitter power struggle between industrialists and unions.97 Strikes have been relatively rare, however, by comparison with other European countries. Moreover, other features of industrial relations also work to realize the broad principle of “social partnership” between labor and capital. One of the most distinctive is Germany’s co-​determination system, under which workers are guaranteed representation on the governing boards—​both the management board and supervisory board—​of firms, as well as the enterprise-​level works councils. As with other institutional features of Germany’s mixed system, co-​determination has been regularly modified. As noted above, one of the most important reforms was its extension to all large enterprises, not just the iron, coal, and steel industries where it initially prevailed.98 Another major reform

 

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occurred when workers’ right to participate in the selection of the director of a firm was granted by federal law and subsequently upheld by the Constitutional Court over strong objections by business. Another important element of the institutional embodiment of the social partnership principle is the system of labor courts, which adjudicate labor disputes and are composed of representatives of business, labor, and government.99 The principle of social partnership is embedded in multiple institutions of the German system. Over time it has evolved incrementally, loosening in some respects as corporatist elements have given way to more flexible labor markets, and tightening in others as the courts have defined the rights of employees and employers more concretely. Yet it has not so far produced stasis or declining productivity. One reason, I believe, is that it encourages the sharing of the gains of productivity growth among workers and employers. As I argue in Section 7 below, the principle that the benefits of economic growth should be distributed broadly, rather than exclusively to the top earners or owners of capital, tends to induce the pooling of productive knowledge. This increases both productivity, and in turn shared prosperity. I certainly do not mean to overstate Germany’s successes. Income inequality has risen in recent years and wealth inequality is high. The same process of recursive compound growth of top-​end income and wealth that we saw playing out in the United States is doing so in Germany as well. Income growth at the top is increasing due to the high current account surplus and corporate profits of successful firms.100 The consistent current account surplus reflects Germany’s dependence on overseas demand for its products, one reason that Germany has been willing to subsidize southern European economies for whom maintaining the euro as a currency created high trade deficits during the height of the financial crisis and downward pressure on wages. High real estate valuations and low real estate taxes contribute to wealth accumulation at the top. Like other high-​income countries, Germany faces the dilemma of integrating non-​European migrants into its society. Labor market dualism between insiders and outsiders is one reason. That is, those who are incorporated into the system of employment-​based social insurance and collectively negotiated wage agreements people have greater social protection than do those outside it, such as gig workers, women, part-​time workers, and immigrants.101 Again, however, we must take a comparative perspective. Total labor force participation is very high—​at 79% in 2019, on a par with the “liberal” economies of Canada and Britain, and much higher than the United States (73%), France (72%), or Italy (66%).102 Youth unemployment is also significantly lower than in comparison countries: 5.8% in Germany in 2019, as compared with 11% in the United Kingdom and Canada, 8.4% in the United States, 20% in France, and 29% in Italy.103 Youth labor force participation is much higher. Figures 9.3 and 9.4 illustrate the trends.

 

WDI: unemployment rate, ages 15–24 1977–2021 40

Youth unemployment %

Italy

30

France

20

OECD Britain

10

USA Germany

0 1980

1990

2000

2010

2020

Source: WDI [https://databank.worldbank.org/source/world-development-indicators#]

Figure 9.3:  Youth Unemployment Rates, 1977–​2021, Selected Countries

WDI: youth labor force participation rate, ages 15–24 1977–2021

Youth labor force participation rate %

70

Britain

60 USA 50

Germany OECD

40

30

France

Italy

20 1980 1990 2000 2010 Source: WDI [https://databank.worldbank.org/source/world-development-indicators#]

2020

Figure 9.4:  Youth Labor Force Participation Rates, 1977–​2021, Selected Countries

 

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9.6.  Unification Unification in 1990 was the greatest shock to the German system of its postwar history. The Federal Republic’s population at the time was about four times larger than that of the German Democratic Republic (about 63 million vs. 16 million). Absorption of the East German society posed a huge challenge, because the Federal Republic extended—​many would say imposed—​ its entire political, social, and economic institutional framework to the former East German territory. In contrast to Russia and all other postcommunist states, East Germany was not left free to allow inherited power inequalities to distort the creation of the new market infrastructure. The state enterprises of the East German regime were privatized by a specialized agency called the “Treuhandanstalt,” or Trust Institution, which was created in 1990 and dissolved in 1994. Its task was to find new private owners for the more than 12,000 state-​owned enterprises inherited from the old regime.104 The Treuhand succeeded in finding buyers for about 8,000 of them, and liquidated another 3,700, mostly smaller firms. Of those that were sold off and privatized, the overwhelming majority were bought and taken over by West German firms; very few were sold to East German or foreign investors. By the end of 1993, 87% of all enterprises, by employment, had been sold to West German investors. The West German government also contributed investment in new capital, and particularly to rebuilding infrastructure. The consequence was a staggering transfer of public and private wealth from the West to the East, amounting to the equivalent of about 5% of West German GDP each year in the early 1990s.105 Extending the social protection system to East Germans was financed through social contributions rather than through taxes; a “solidarity surcharge” was added to West Germany’s payrolls to help finance it. Total net transfers from west to east have amounted to about €60 billion a year, or €2 trillion in all, over 30 years. The psychological cost has been similarly steep. The legacies of social organization on the two sides of the border have led to a persistent division between the old and new states in economic performance, political behavior, and cultural values—​what Germans called die Mauer im Kopf (the wall in the head).106 Lingering sentiments in the east that its population has been treated like a colony have contributed to the much stronger support for extreme right-​wing parties in the eastern states. Studies of public values and beliefs have found a continuing division between the two parts of Germany. The population in the eastern states has tended to be more passive in participation, more critical and less trusting of existing institutions, more inclined to think that they are not receiving “their fair

 



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share of the good things in life.” They were largely as supportive of democracy in the abstract than their western counterparts, but likelier to tie democracy to guarantees of material security.107 West Germany’s effort to rebuild the political culture of East Germany was on a scale comparable to the reconstruction of the German political culture following World War II—​which amounted to an enormous overhaul of all vehicles of political socialization—​but following radically different models in the two parts of the country.108 When the West German enterprise managers took over the East German enterprises, they found they had to undertake major restructuring. This included reducing workforces and replacing managers. One survey found that 70% of the managers of the enterprises had been transferred from the western parent company.109 Industrial production sank to about a third of its former level, and more than a third of jobs were lost. Although formal unemployment reached only 15%, actual unemployment was on the order of one-​third.110 Manufacturing employment fell by about three-​quarters.111 Wages remained low, although they were high relative to productivity, which at the point of unification was less than one-​third the West German level.112 The adjustment was acutely painful, and the effects still linger today. Unification spurred a large increase in early retirement and an increase in wage subsidies. However, there was no mass unemployment or poverty. Although market income inequality rose sharply, post-​ fiscal income inequality scarcely rose at all. In effect, the West German welfare state was transferred to East Germany, keeping incomes from collapsing during a transition of intense economic strain. The fiscal burden on West Germany was immense. By 1993, public expenditures accounted for 80% of east German income, with welfare spending on unemployment insurance and labor market support alone providing almost 20%.113 Likewise there was no demographic catastrophe, such as occurred in Russia. In fact, as a result of the extensive measures to protect living standards in the east and improve public health services, life expectancy for men and women in the two parts of Germany became nearly equal. Tables 9.4 and 9.5 show how equal social conditions and incomes became in the two parts of the country. Table 9.5 shows that the distribution of disposable incomes in the two parts of Germany scarcely changed at all, despite a sharp recession which struck in 1991.114 Moreover, industry concentration did not rise. The GDR’s planned, centralized economy had largely suppressed the Mittelstand sector, preferring instead, as in the Soviet model, to concentrate production in larger enterprises. Another policy goal, therefore, for the Treuhand was to ensure that ownership

 

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Table 9.4: Life Expectancy at Birth, East and West German Federal States Women

Men

1991–​93 1999–​01 2007–​09 2015–​17 1991–​93 1999–​01 2007–​09 2015–​17 East Germany

77.18

80.53

82.37

83.22

69.86

73.69

76.27

77.25

West Germany

79.48

80.72

82.57

83.17

73.11

75.43

77.58

78.61

Source: Thomas Lampert, Stephan Müters, Benjamin Kuntz, Stefan Dahm, and Enno Nowossadeck, 30 Years after the Fall of the Berlin Wall: Regional Health Differences in Germany (Berlin: Journal of Health Monitoring, Robert Koch Institut, November 2019), 4:S2 . Cf. Arjan Gjonça, Hilka Brockmann, and Heiner Maier, “Old-​Age Mortality in Germany prior to and after Reunification,” Demographic Research 3 ( July–​ December 2000): 1–​30, who show that the greatest improvements in life expectancy in the east occurred among those over 60 years of age.

Table 9.5: Distribution of Disposable Household Equivalent Income, by Quintile, West and East Germany, 1990–​1993 Gini

Bottom quintile

2nd quintile

3rd quintile

4th quintile

Top Poverty quintile (50% line)

West Germany 1990

0.185

11.8

15.8

19.2

22.9

30.2

3.4

1991

0.198

11.3

16.1

18.9

22.3

31.2

4.4

1992

0.200

11.1

15.9

19.1

22.5

31.3

5.9

1993

0.216

10.6

15.5

18.8

22.7

32.4

7.3

East Germany 1990

0.267

9.4

14.0

17.7

22.5

36.4

10.9

1991

0.263

9.5

14.0

17.8

22.8

35.9

10.7

1992

0.264

9.5

14.1

17.7

22.8

35.9

10.1

1993

0.274

9.2

13.8

17.7

22.8

36.5

11.5

of the former East German enterprises was as dispersed at that of West German enterprises.115 In this it succeeded. Consistent with the active policy of guarding against excessive industry concentration, the German Monopoly Commission (Monopolkommission) closely analyzes data on aggregate industry concentration and informs the government about possible threats to competition.116 Overall, in contrast to the United States, industry concentration is not rising in Germany.

 



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Germany: Share of 100 largest firms in value-added in economy, 1978–2016 2000

Total value added in economy (blns Euros)

Blns euros

1500

Biggest 100 firms share of value-added

1000

19

18

17 500

16 Biggest 100 firms total value-added

Share of total value added of biggest 100 firms

20

15

0

1980

1990

2000

2010

2020

Source: Monopolkommission Hauptgutachten XXII: Wettbewerb 2018 Figures are adjusted for inflation

Figure 9.5:  Industry Concentration in Germany, 1978–​2018 Source: Monopolkommission, Stand und Entwicklung, 94.

The commission’s 2018 report on the state of competition showed that the level of competition has been falling since 2000. Other indicators also show lower concentration. (See Figure 9.5.) The share of value-​added contributed by the top 25 firms—​about 60%—​ has remained relatively constant since 1978. None of the top 100 firms owns more than half of the shares in another top-​100 firm. It is the case that markups have risen across all industries, although they have risen more for firms in more concentrated branches and those with higher market power. However, profit margins are not rising when weighted by revenue shares.117

9.7.  How Stable Is the German System? I began this chapter by asking: in comparative perspective, how successful has Germany’s model been in delivering shared prosperity? The evidence presented has made the case that it has been quite successful. Compared with the United States, still more with Russia and China, Germany has achieved sustained high growth of incomes that has not come at the expense of high economic inequality. Several other European countries certainly have also achieved similar results. They did not, however, undergo so comprehensive a restructuring of

 

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their economies. In this section I venture to explain what accounts for this record of performance. I have argued that the original social market economy paradigm has endured through incremental change. Coverage of social insurance protection against income risks from old age, illness, accidents, disability, and unemployment has been widened to nearly all strata of the population, including the self-​employed and farmers, and contributions and benefit levels have been raised and lowered according to the economic cycle. In recent years market elements have been layered on, such as the private retirement savings accounts but under heavy government regulation and with high government subsidies.118 Unemployment benefits have been raised, then reduced, while active labor market policies and subsidies for early retirement increased. Collective bargaining continues but at the more localized levels of the plant rather than industry-​wide.119 In response to fiscal pressures, eligibility rules have been tightened and benefits reduced. A greater role for market incentives has been introduced through the system of “Riester pensions” (voluntary but subsidized individual retirement savings accounts) and the Hartz reforms of unemployment insurance, which tightened eligibility for unemployment benefits while permitting unemployed individuals to continue collecting unemployment benefits while working.120 The original paradigm, always a compromise among competing principles, has been incrementally altered without being replaced. Corporate governance has changed, with greater acceptance of a role for shareholding, while the older pattern of interlocking ownership through crossholdings has greatly diminished.121 A few of Germany’s large state monopolies, such as the postal service, the telecommunications system, the railway system, and Lufthansa, have been partially privatized. Gradually and incrementally, the German system has been transformed through adaptation to changing circumstances. Current challenges include adaptation of the manufacturing-​based industrial economy to newer digital technologies, population aging, coping with severe shortfalls in imported Russian natural gas, and the longer-​term imperative of transition to a clean-​energy economy.122 Germany’s postwar history warrants a cautiously optimistic view of Germany’s ability to surmount these problems. The German institutional framework has not been a rigid equilibrium, but rather has undergone constantly evolution. The question of the resilience of the social market economy has preoccupied specialists on Germany for decades.123 The debate partly reflects the difference between two conceptions of institutional change. One focuses on the stability of an initial set of complementary institutional arrangements in society, economy, and polity and worries constantly that it is in danger of collapse. The other treats the system as subject to continuous adaptation that has preserved stability. I have argued for the second view, observing that there has not

 



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been—​to date, at least—​a crisis of democracy comparable to that of the United States. There is an old philosopher’s puzzle called the “ship of Theseus.” According to Plutarch, as Theseus and his crew sailed home from Crete, Theseus replaced every plank of his ship as it wore out, often with newer and stronger timbers. Ever since, generations of philosophy professors have posed the question to their first-​year students: was it the same ship when it arrived in port or not?124 Since there was no single point at which the ship was not the same ship or stopped sailing, it is reasonable to consider it the same ship. I believe that Germany’s evolution represents a similar kind of transformation—​the paradigm is the same, although individual elements of it have been replaced.125 Establishment of the new postwar policy paradigm in the late 1940s did represent a radical break from past systems, although the new system certainly incorporated and adapted some older elements of Germany’s political economy while introducing new features founded in ordoliberal theory. Since then, Germany has not adopted a new policy paradigm. Germany’s liberalization in the late 1940s laid the foundations for a system that retained fundamental features of the original postwar system while adjusting it to new demands. Seventy years later, Germany’s postwar performance compares favorably to any other advanced capitalist democracy with respect to concrete outcomes such as the growth and distribution of incomes, employment and labor force trends, the quality of public goods, the extent of poverty and deep poverty, the vigor of electoral democracy, and the protection of political rights. Germany has not sacrificed equity to efficiency under the pressure of European integration, globalization, automation, social change, or unification or succumbed to polarization and extremism. In fact, whereas affective partisan polarization in the United States has risen rapidly over the last four decades—​about 4.8 percentage points per decade—​Germany’s has fallen almost as sharply, 4.0 percentage points per decade.126 Growth has generated widely shared prosperity, as the ordoliberals hoped, reinforcing the stability of the original democratic compact. The German sociologist Ralf Dahrendorf assessed Germany’s prospects for stable democracy in a series of studies beginning in the early postwar period. For him, the character of the elite groups that dominated Germany’s state and society over its history was the decisive factor determining the form of its political regime. The alliance of “iron and rye” (great industrialists and landowners) with autocratically minded state and military bureaucrats, which formed in the imperial period and was never entirely displaced under Weimar, was finally shattered only by Hitler’s regime. Hitler appealed to some elements—​nationalism, state power, autocracy, militarism—​but destroyed the old Prussian landowning nobility that had served as the social base of the administrative and military elite. The new postwar elite was managerial, not aristocratic, and depended on public

 

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support. It is tied to a representative form of government in which constitutionally regulated competition generates legitimacy. The public demand for material prosperity rather than national greatness built support for personal freedom as citizens and members of society. Since Germany’s democracy now rested on pluralism rather than the concentration of economic and social power, Dahrendorf argued that it had a greater chance of survival than did the feeble institutions of the Weimar period.127 Dahrendorf ’s sociological analysis helps explain how Germany has succeeded in adapting to change without succumbing to the restoration of authoritarian rule. Certainly there have been surges of right-​wing extremism. Chancellor Merkel’s decision to admit a million refugees in 2015 following the civil wars in Syria, Iraq, and Afghanistan provoked a sharp backlash in the form of right-​wing extremism. Still, Germany’s Alternative für Deutschland (Af D)—​Germany’s equivalent to Trumpism—​pulls only around 10% of the vote,128 whereas the share of Republicans in the United States who believe that Donald Trump actually won the 2020 election reaches as high as three-​quarters.129 Around 40% of Republicans (around 20% of all Americans) approve of the violent invasion of the Capitol Building on January 6.130 The radicalized, extremist, populism visible throughout the capitalist world has become a far greater threat to American democracy than to Germany’s. Germany’s politics has remained centrist, whereas the combined impact of rising inequality, polarization, partisan sectarianism interacting with the deeply skewed institutional makeup of American electoral representation have led to gridlock and, in the Trump period, extremism.131 It would be unthinkable for the German government to pack its courts and bureaucracy with right-​wing zealots or to intervene with state election officials to pressure them to overturn the results of an election. Liberalization has not encouraged a major party to suppress the voting rights of its opponents. The reason lies in the fact that Germany’s economic growth has not produced deep inequality and political polarization. Pluralism has helped ensure that the benefits and costs of growth are widely shared across a society marked by constant bargaining and competition. In asking whether the system is stable, we must keep in mind that, decade after decade, observers have declared that the combination of circumstances that fueled Germany’s postwar success were now exhausted. In the early 1980s, one German scholar claimed that Germany was unable to adapt to the new circumstances of the 1970s and had entered a period of permanent declining employment.132 A prominent German expert, Wolfgang Streeck, wrote in 1997 that Germany’s model had become no longer viable by the late 1980s and that unification would deal it a fatal blow.133 In 2004 he wrote of the “decline of the German political economy” as Germany entered a state of “hyper-​stability, or stagnation.”134 In 2010 he predicted a “lasting low-​employment equilibrium”

 



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and claimed that the state’s fiscal capacity had “withered away over time.”135 The most recent round of such predictions occurred in the fall of 2021, as Angela Merkel’s long tenure as chancellor ended and analysts pointed to the accumulation of unresolved problems. The Economist writes of “the mess Merkel leaves behind.”136 One German sociologist writes of the post-​Merkel future, “Instead the new era, locked into consensual politics and tepid policy, is likely to be more of the same.”137 They may of course be right. Yet it bears remembering that similar pronouncements have been uttered in every decade since the late 1940s and experience has proven these forecasts wrong. But if Germany’s paradigm has in fact led to continuing shared prosperity, what are the reasons? How much can we attribute to ordoliberal ideas, skillful governance, or unique circumstances? Probably the most convincing treatment is that offered by the German economic historian Werner Abelshauser.138 Abelshauser accepts that circumstances, ideas, and the legacy of corporatist elements all played a role. But he argues that the key to Germany’s performance is less any of these factors than the unanticipated success of the co-​determination system and other institutions for bargaining between workers and employers. Their effect, he believes, has been to maximize the degree to which the useful knowledge embodied in all members of a workforce is fully brought to bear in production. The result is the tendency for innovation to be incremental rather than radical, but also continuous and adaptive. Growth as a result has been sustained, but it has also been widely shared.139 In emphasizing the importance of knowledge as a productive factor, we must also emphasize the role of the small-​and medium-​sized enterprises, often referred to as the Mittelstand. Not only have these firms been vital to Germany’s economic success, but they have also constituted a social base for the political compromises that have guided Germany’s adaptation to changing external conditions. Mittelstand firms contribute over half of German value-​added, over 80% of apprenticeships, and 35% of total turnover. They have been oriented to exporting to the international market since the 1950s.140 Particularly in the early years of the Federal Republic, the Mittelstand as a social group represented a core political constituency for the social market economy: defensive of their autonomy In the face of pressure from large-​scale firms; oriented toward adaptive change and incremental innovation; culturally conservative and closely tied to local communities and regions; and strongly supportive of the government’s efforts to protect competition. Erhard cited their “values and attitudes” (Gesinnung and Haltung) as a defining characteristic, as at least as important as their economic status. For Erhard the Mittelstand was a pillar of the social market economy model as well as a major source of political support.141 He relied on the Mittelstand as a counterweight to the pressure from the big industrialist lobby in the debate over competition law and against inflationary wage pressures from collective bargaining by the peak labor and employer associations.142 The

 

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architects of postwar recovery restored the Mittelstand to its position as a crucial feature of the economy after a decade of Nazi efforts to subordinate it to the centrally controlled, cartelized economy. If ordoliberalism had to be reduced to the political interest of a single sector, it would be that of the Mittelstand. Erhard and subsequent German governments have been determined to protect the Mittelstand through noninflationary wage and price agreements, disciplined monetary policy, and protection of the currency’s exchange value.143 Mittelstand firms compete more on quality than cost, so they need constant technological innovation to maintain their competitive edge. They are extremely sensitive to price of inputs (and exchange value of the currency). They are strongly tied through the chamber system to government, labor, research, standard-​setting, and training144 In the 1950s, Mittelstand firms grew faster than the economy as a whole.145 They benefited from a favorable tax regime, a close association with the Kf W (Germany’s national development bank), strong ties to research institutes, and government recognition of the qualifications certificates earned by graduates of the training system. They are also strongly oriented to regional and sector clusters, a tendency facilitated by the chamber system.146 The chamber system also ensures that their access to skilled labor is not swallowed up by large firms. Germany’s banking sector is organized very differently from that of the United States. Only around 40% of banking assets are controlled by private banks (and only a quarter are controlled by the large private banks). The rest are owned by nonprofit savings banks and cooperative banks, which tend to have strong local roots and long-​standing ties to the smaller firms that rely on them for financing.147 These regionally and locally based savings banks have played a crucial role in financing small and medium-​sized Mittelstand enterprises. What exactly is the Mittelstand? We can get a better idea of its size by looking at the small and medium enterprise sector—​which overlaps with but is not identical to the Mittelstand.148 This sector contributes about 61% of net total value-​ added in the economy, an even higher share than the 57% share in 1999.149 Small and medium-​sized firms continue to employ around 80% of all apprentices. Their share of German export turnover is in the range of 16%–​17%, a figure that does not reflect the large share of their production that goes into the export products of large firms. Although the sector’s composition has changed substantially since the 1960s, losing much of its presence in retail, textiles, and consumer electronics industries, it retains its footholds in many of the high-​end machine and machine-​tool products that keep Germany’s economy internationally competitive. While observers—​going back to Marx and Engels in 1848—​have been predicting the extinction of the Mittelstand sector with some regularity for a century and a half, it has repeatedly demonstrated its vitality for German economic success and its importance for the political and social fabric of postwar

 



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Germany.150 Rather than breaking down under the pressure of automation and globalization, Germany’s Mittelstand sector has continuously adapted to change. The Mittelstand is largely nonunionized. For large-​scale enterprises, the Mittelstand institutional links among firms, regional savings banks, business chambers, R & D institutions, and government are complemented by the system of labor-​employer cooperation fostered by collective bargaining, co-​ determination, works councils, and labor courts. Taken together, these institutional features of Germany’s postwar system have grown more important as the economy has come to depend more and more on knowledge as opposed to physical capital for the creation of value.151 Germany’s version of the knowledge economy does not confuse productive knowledge with financial legerdemain. In contrast to the United States, Germany’s financial industry has not consumed the real economy. As a share of GDP, the value-​added of the financial sector has declined in Germany while that of manufacturing has held steady since 2005, even as the technological sophistication and global competitiveness of German industry have risen steadily, as Chapter 6, on financialization, showed. We can also see this by comparing the top dozen firms by market capitalization in the United States, United Kingdom, and Germany. In the United States, a third are in the FIRE sector. In Germany, only two FIRE companies made the list. In Germany seven of the top 12 are in manufacturing, but none of the US companies is. Two natural resource companies in the United States are on the list (ExxonMobil and Chevron), but none in Germany (Table 9.6). Financial and resource rents comprise far less of Germany’s economy than they do in the United States. Germany’s institutions face the same pressures as do other high-​income capitalist economies: adapting to technological change, competition from rival export-​oriented countries, a reliance on uncertain energy sources. Nevertheless, Germany’s export-​led growth model has remained viable despite frequent fears that its high-​cost, high-​value-​added orientation, and stress on industry over services, would fail in the face of globalization and slow adaptation to digital technologies. Figure 9.6 indicates that Germany’s reliance on foreign trade has been steadily growing. Certainly, significant problems confront Germany. Maintaining an export-​ oriented economy on the basis of value-​added and technological sophistication requires not only continuous innovation but also high disposable demand in export markets. The deep strains within the Eurozone between those countries such as Germany that run strong positive trade and current account balances and those with weak or negative balances threaten the viability of the model separating fiscal governance at the national level from monetary governance by the European Central Bank. The divergence between Germany’s

 

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Table 9.6: Twelve Largest Companies in the United States and Germany by Market Capitalization, 2018 Company

Market capitalization, US$ billions

Apple

945.98

Microsoft

922.12

Alphabet

837.21

Berkshire Hathaway

503.04

Exxon Mobil

345.39

JPMorgan Chase

342.08

Bank of America

280.20

Verizon Communications

242.06

Chevron

238.44

AT&T

232.23

Wells Fargo

217.06

Citigroup

153.35

SAP

133.99

Allianz

97.77

Siemens

90.90

Volkswagen

84.80

Deutsche Telekom

79.70

BASF

71.18

Daimler

66.32

Bayer

64.54

Bayerische Motoren

53.62

Deutsche Post

41.52

Munich Re

34.94

Continental

33.01

southern European neighbors and high-​wage northern-​tier countries in the EU has created a persistent crisis for the euro that cannot be resolved by currency devaluations. Social mobility in Germany is low by OECD standards, especially for children of poor families, and a higher share of the workforce than in other OECD countries is employed in part-​time or contract labor.152 (The apprenticeship system

 



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Foreign trade as share of GDP, 1960–2019

100

Foreign trade % of GDP

Germany

France Britain Russia

50

China

US

0 1960

1980

2000

2020

Source: World Bank WDI [https://databank.worldbank.org/source/world-development-indicators#]

Figure 9.6:  Foreign Trade as Share of German GDP, 1960–​2019

may be one reason for this fact.) Germany’s share of older people is higher than the OECD average, slightly above France’s, although below Italy’s. Vigorous party competition has tended to produce a pull toward compromise and centrism in German politics. Germany therefore poses a sharp contrast to the cumulative effects of the alliance of corporate economic power with conservative political forces that have moved American policy ever further to the right, to the point of subverting fair electoral competition entirely, and certainly to Russia and China. Whereas in the United States, over the past several decades, the concentrated power of the Right has used its influence in electoral, regulatory, and judicial institutions to erode the redistributive potential of majority rule, Germany’s postwar development stands out for the incremental nature of policy change, the result of constant struggle and bargaining in an institutional environment that has not systematically favored either Left or Right.153 The argument that Germany’s institutional configuration promotes the sharing of knowledge in the economy by encouraging broad sharing of its benefits helps explain why Germany’s version of liberalization has not brought about deep economic inequality or a throttling of democratic rights. The fact that Germany’s institutions are well suited to ensuring that shared knowledge in a knowledge-​intensive production process is harnessed efficiently has curbed the appropriation of rents that I have argued is the source of high inequality in the United States, Russia, and China. In Germany, far more than in the other

 

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three countries, labor is treated as a productive asset, not a source of cost, and as a partner in production. Far more broadly than in the other three cases, skill is kept complementary to technology through joint investment in matching skill acquisition to technological innovation.154 Deep connections between workers and firms increase the degree to which skill is endogenous to the production process, rather than purely an exogenous factor of production.155 The institutions promoting cooperative industrial relations help to ensure that the benefits of knowledge are returned to labor as well as capital and management in earnings. This is one reason that automation is not killing jobs in Germany and that business has not turned to government to suppress labor’s claims to its share of the social surplus.156 Therefore, even though the labor share of national income is declining in Germany, as elsewhere, wages are not stagnant or falling. The complementarity between economic and social policy helps ensure that the investment in skill and education in production yields both public and private returns. A condition for success in this respect is that knowledge in fact be productive. It is highly misleading, therefore, to confuse years of education with actual productive human capital. The share of the German adult population with a higher educational degree is lower than in the United States (about 35% in Germany vs. about 45% in the United States), but the share of adults with useful skills is higher. The system of shared investment and shared benefits helps maintain that complementarity. The distinction between formal educational degrees and useful skill is most glaringly illustrated by the case of Russia. In Russia, despite the population’s relatively high levels of formal education, productivity is extremely low. Formal educational attainment levels in Russia are higher than the OECD average. But the average return to education (meaning the average increase in earnings associated with an additional year of education) has fallen steadily since 2000 to well below the world average and even the EU average. Russia’s 2018 return to education was 5.4%; the global average is 15%, that of the EU 10%. Moreover, the returns to vocational education are only a third of those for general education.157 The World Bank estimates that as a share of total wealth, human capital is only a fifth that of the OECD average.158 The institutional framework of Russia’s economy is as poorly suited to taking advantage of Russia’s educational system as Germany’s is well suited. This point helps explain both Germany’s sustained economic growth and its relatively equal distribution of the fruits of growth, just as it helps explain Russia’s economic stagnation and extreme inequality. In Russia, neither the private nor public return to education is high. In the United States, study after study reveals that much of the US education system fails to yield benefits either for individuals or for the economy generally, because it is often severely mismatched to the abilities of individuals or the needs of the economy.159 One major reason for this is high inequality. The circumstances of an individual’s

 



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early life—​household and neighborhood, quality of schooling and healthcare—​ strongly influence individuals’ opportunities to acquire the education and skill that would yield benefit both to them and to society. This is one reason that income inequality among families has become far more closely associated with educational achievement among children in recent decades.160 Germany’s much lower level of inequality, the far narrower differentials in income levels and access to public goods, together with a deliberate effort to ensure that the education system benefits both individuals and society, help explain how it has achieved economic growth without severe inequality. For the most part, Germany has used technology to complement rather than replace labor. Whether new technology substitutes for or complements labor, after all, is to a large degree a deliberate choice over which technologies to adopt.161 Those choices are made by economic actors in an institutional environment shaped by past choices. When technology complements labor, it can raise wages and opportunities by ensuring that the private return to knowledge is aligned with the social return. But this takes an appropriate institutional environment, both in the organization of production and in the broader society, that works to match the knowledge of employees to the technologies used. In the United States, when electric power was adopted by firms, the skills of those workers who could use it were complementary to the technology, and were rewarded with wage gains.162 However, we should not suppose that earnings in the labor market will always automatically reflect the marginal value of workers’ production. Skill-​biased technological change may tend to increase the elasticity of substitution of skilled and unskilled labor and of capital and labor in such a way as to make it increasingly profitable to replace workers with machines. However, in the United States we have not seen an increase in wages for skilled workers—​ the only significant wage gains have gone to a narrow slice of employees at the top of the distribution.163 Clearly nonmarket forces shape the way the returns to skill are distributed. The German system of education and skill formation, relying on intermediaries such as sectoral and regional trade and industrial associations, ensures not only a better match of skill to production, but in some cases an oversupply of skill relative to immediate production needs. That is, the emphasis on broad competencies rather than narrow, occupationally defined skills tends to allow workers to adapt more readily to new productive techniques, encouraging firms to upgrade capital.164 Sometimes this complementarity of investment in skill and capital is characterized as the difference between a focus on specific as opposed to general skills and treated as a major factor in shaping social policy in coordinated market economies.165 However, the distinction between general and specific skills can be misleading, because a lengthy apprenticeship period such as that used for many professions in Germany—​3 to 4 years—​builds

 

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a fairly strong general foundation for broad and adaptable competencies.166 Certainly the logic of co-​investment in productive skill helps explain the institutional complementarities we have observed in Germany, but the general-​specific distinction may be confining if the critical issue is the degree to which workers’ knowledge is fully engaged in the economy. Where institutions are conducive to a balanced distribution of the gains from productivity, labor market inequality is likely to be much lower. Germany’s social market economy is liberal at heart, and has adapted a number of coordinating institutions to serve liberal ends. These include coordination of labor relations, social insurance, and dual system of education and training. In each case, the institutional setting works to align private interests with the public good. Market mechanisms are used, for example to encourage the linking of contributions to benefits in the social insurance system, but are complemented by transfers that ensure a floor of social protection for the vulnerable. Institutions induce shared public and private investment in education and skill formation, which in turn yields both public and private benefits. Labor relations tend—​not invariably but usually—​to balance wage demands against the profits sought by employers by linking earnings to productivity. All these institutional features of the German system mitigate rent-​seeking on the part of those with market power, whether by large firms vis-​à-​vis small, finance versus the real economy, or capital vis-​à-​vis labor. In a world where knowledge increasingly serves as a crucial productive factor, institutional arrangements such as Germany’s serve to maximize both the returns to knowledge and their equitable distribution across society. In turn, shared prosperity reinforces broad commitment to democratic principles.

9.8.  Reckoning with History How well has Germany confronted its Nazi past? The Berlin-​based American philosopher Susan Neiman has forcefully argued that Germans have been much more successful in confronting the racist evils of their past than have Americans (she emphasizes that comparing their responses is not the same as equating the magnitudes of the evil).167 While the extreme right wing in America has aligned itself with white supremacy and fueled the efforts by Republican leaders in many states to pass laws to limit political rights—​measures that, while ostensibly race neutral, are primarily aimed against Black voters and Black protesters—​white supremacist ideology remains strongly marginal in German politics.168 Racial and ethnic prejudice continue to be expressed by right-​wing extremists in Germany, as in the United States and other countries, but they are confronted and challenged by the political mainstream far more than is the case in the United States.

 



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Germany’s willingness to acknowledge the reality of its past has come slowly and painfully. Most observers agree that not until the late 1960s, following significant generational turnover and a concerted effort to rebuild the political culture, did Germans begin asking serious questions about the Hitler regime. The first postwar German chancellor, Konrad Adenauer, denazification ruled out denazification. Adenauer’s position reflected a combination of political calculation and pragmatism. He also benefitted from the moral authority gained from the fact that he had been—​very briefly—​detained by the Nazis. Adenauer asserted that “the division of the German people into the just and the unjust must finally end” and that Nazi “fellow-​travelers” be left in peace. Adenauer also pragmatically observed that Germany could not do without the expertise of officials who had served in the previous regime. By the standards of the German political elite of the day, Adenauer was a moderate. He rejected the notion of collective guilt, but, if only for pragmatic reasons, accepted Germany’s obligation to pay compensation to Jews and to the state of Israel.169 The United States fully backed his position, not only accepting that Germany should play a major role as an ally in the Cold War, but also recruiting many ex-​Nazis as intelligence resources. Not until the late 1960s and 1970s did young Germans begin asking their parents what they had done in the war.170 A deep question concerns the degree to which the Third Reich’s policies contributed to the accumulation of wealth that postwar Germany has built on. Recently a Dutch journalist revealed the Nazi past of several of the business dynasties that remain prominent to this day. He writes: “By 1970, Friedrich Flick, August von Finck, Herbert Quandt, and Rudolf-​August Oetker made up West Germany’s top four wealthiest businessmen, in descending order of fortune. All four were former members of the Nazi Party; one of them had been a voluntary Waffen-​SS officer; they had all become billionaires.”171 Hitler’s program of rearmament, state investment in highways and automobiles—​particularly the “People’s Car,” Volkswagen, which Ferdinand Porsche began producing, the use of forced labor from concentration camps and occupied territories, the seizure of Jewish-​owned enterprises, the suppression of labor demands, the elimination of market competition—​all enriched the firms’ owners. In turn, they were required to fund Hitler’s party and projects. All did so, some, such as Friedrich Flick, with enthusiasm. Major firms such as Krupp, I. G. Farben, Siemens, Daimler-​Benz, BMW, and others used forced and slave labor and properties confiscated from Jews. What limited efforts there were after the war to hold them accountable for their part in the war effort were made ended quickly when American occupation policy shifted to support for German industrial recovery. Alfried Krupp was pardoned and his assets returned; Günther Quandt, founder of BMW, was declared “apolitical” and opposed to Nazism; Rudolf-​August Oetker, founder of the Dr. Oetker food products firm, was given back control of his firm.172 Today

 

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their heirs are among the wealthiest Germans. Quandt’s heirs Susanne Klatten and her brother Stefan Quandt are among the top 10 on the Forbes list of wealthiest Germans in 2021. August von Finck Jr., heir of a dynasty that financed numerous Nazi-​era firms, is in 16th place. Heirs of Rudolf-​August Oetker occupy 18th place.173 At their trials, the industrialists offered defenses that have a familiar ring. Friedrich Flick’s lawyer protested that the trial was “not an attack on Dr. Flick and his assistants, but an attack on the entire German economy, on German capitalism and its industrialists.” Ferdinand Porsche’s defense was that “Professor Porsche has always been only a technician, a designer . . . political issues of the day were and still are completely outside his sphere of thought.”174 One of the heirs of the von Finck banking dynasty, August von Finck, was linked by investigative reporters from Der Spiegel to the founding of the Af D.175 Certainly he was an ardent and longtime supporter of right-​wing causes.176 He was, however, exceptional among the present-​day scions of Nazi-​connected billionaire dynasties, most of whom have supported mainstream parties. The history of collaboration with the Nazi regime on the part of some of Germany’s most prominent business dynasties raises troubling questions. To what extent did their service to the Third Reich contribute to building their companies’ fortunes? How much is Germany’s prosperity today an inheritance of the Hitler era? Is the relatively high inequality of wealth a legacy of the Nazi regime? Although full answers to these questions lie well beyond the scope of the book, it helps to think about them in a comparative perspective. Very similar questions are increasingly being raised about the history of capitalism in America, as historians reveal how intimate was the relation between slavery and American national prosperity. Far from being a system confined to the South and its plantation economy, slavery laid the foundations for the accumulation of mercantile, industrial, and financial wealth that made America rich and powerful. Although the North’s reliance on innovation and entrepreneurship might have ensured that the North industrialized even in the absence of slavery, the fact remains that it did not.177 In the case of Germany, the large industrial and financial firms that served the Third Reich and continue to populate Germany’s economic landscape all have their origins long before the Third Reich, in the late 19th century or early 20th century. Adaptable, pragmatic, and lacking any moral compass, these firms have remade themselves many times. Yet so have American firms. Historian Sven Beckert makes the point succinctly in his book on the global cotton economy: “The constant reshuffling of the empire of cotton, ranging from its geography to its systems of labor, points toward an essential element of capitalism: its ability to constantly adapt.”178

 



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Capitalism around the world has often employed brutal coercion of labor in its early stages. In the Americas, property owners seized land and forced Black and Native populations into slavery.179 Communist regimes employed similar methods to achieve economic development, including forced labor in prison camps, labor conscription, internal colonization, forcible settlement of nomadic populations, agricultural collectivization, and the deliberate inducing of mass famine, as Chapters 7 and 8 pointed out. The freely clearing markets for labor, land, and capital taken by neoclassical economists as assumptions for models of how a capitalist economy works are, in fact, historically rare. The great business firms in Germany adapted themselves to the Nazi wartime economy as readily as did firms in the United States to the system of capitalism.180 It is not property rights that ensures a liberal market economy and a liberal democracy, but the ability to maintain freedom from compulsion over the allocation of labor, land, and capital exercised by concentrations of power—​private or public. As the ordoliberals recognized, it is the pluralistic dispersion of power in society that offers the best hope for such a system. In the next and final chapter, I discuss the way pluralism and liberalism offer an alternative to an exclusive alliance of wealth and power. The ideals of the American Framers are a place to start.

 

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Necessary Opportunities In every political society, parties are unavoidable. A difference of interests, real or supposed, is the most natural and fruitful source of them. The great object should be to combat the evil: 1. By establishing a political equality among all. 2. By withholding unnecessary opportunities from a few, to increase the inequality of property, by an immoderate, and especially an unmerited, accumulation of riches. 3. By the silent operation of laws, which, without violating the rights of property, reduce extreme wealth towards a state of mediocrity, and raise extreme indigence towards a state of comfort. 4. By abstaining from measures which operate differently on different interests, and particularly such as favor one interest at the expence [sic] of another. 5. By making one party a check on the other, so far as the existence of parties cannot be prevented, nor their views accommodated. If this is not the language of reason, it is that of republicanism. —​James Madison, letter to the National Gazette, [ca. January 23] 1792.1 We’re not a democracy. The word “democracy” appears nowhere in the Constitution, perhaps because our form of government is not a democracy. It’s a constitutional republic. To me it matters. It should matter to anyone who worries about the excessive accumulation of power in the hands of the few. . . . Democracy isn’t the objective; liberty, peace, and prospefity [sic] are. We want the human condition to flourish. Rank democracy can thwart that. . . . Government is the official use of coercive force—​nothing more and nothing less. The Constitution protects us by limiting the use of government force. —​Senator Mike Lee (R-​UT), series of tweets during the vice presidential debate, October 20202

10.1.  The Challenge of Political Equality James Madison’s vision of democracy was pluralist and liberal. As a pluralist, he recognized that interests in the young American republic were irreducibly diverse and competing, and differentially endowed with resources. Therefore different parties (by which he meant political camps and tendencies, not only electoral parties) would inevitably arise to advocate for competing interests. His The Returns to Power. Thomas F. Remington, Oxford University Press. © Oxford University Press 2023. DOI: 10.1093/​oso/​9780197685952.003.0010

 



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genius lay in his insistence that the constitutional rules must force these parties to compete for power fairly. Fair competition would curb the accumulation of advantage and promote prosperity, whereas the accumulation of advantage would confer unfair privileges—​“unnecessary opportunities”—​on the wealthy, and, if unchecked, would threaten the political equality of citizens. Excessive concentration of wealth and thus political influence should be opposed through the above-​mentioned “silent operation of laws.” Competition of interests, always respecting the rights of property, would curb the ability of concentrations of wealth to aggrandize power and threaten political equality. As a liberal, Madison believed individual political and economic liberty to be essential to the success of the American experiment. Liberty must be equal, however—​although like the other Framers, his vision did not extend to women or to enslaved people. Rights were individual rather than conferred by social class or property ownership. Madison’s conception of liberty therefore differed in fundamental ways from the view of people such as Senator Mike Lee, who would reduce government’s role in regulating the economy to an absolute minimum. When they insist that the United States is a republic, not a democracy, their position reflects the unease that conservatives have had for centuries about the redistributive potential inherent in democracy—​“rank democracy,” as Lee termed it.3 The right of property for them is a check on the power of the masses to redistribute property through the exercise of political rights. Prosperity, peace, and the protection of property should be the end of government, not political equality, in the view of Lee and those sharing his views. John Adams went much further in his insistence on political equality than did Madison, opposing both slavery and the denial of voting rights to women. Referring to the 17th-​century English theorist James Harrington’s argument that equality of political power depended on equality of property—​then understood as property in land—​John Adams argued in 1776: “Harrington has Shewn that Power always follows Property. This I believe to be as infallible a Maxim, in Politicks, as, that Action and Re-​action are equal, is in Mechanicks.”4 Adams insisted that since the “Consent of the People” is the “only moral Foundation of Government,” that consent required the full political equality of all citizens.5 In an unequal society, the expansion of political equality induces a defensive reaction on the part of those who fear they have something to lose from redistribution. Political science research has shown that the greater the level of inequality in material and political resources, the greater this threat, and hence the more intense the reaction. Democratic transitions are much more likely and more successful in societies with lower levels of inequality of property and power.6 In societies with a larger middle class, a coalition of poor and middle can ease the political tensions accompanying democratization by balancing

 

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guarantees of property rights against obligations to support the public good through taxes. It is in societies where property is more equally distributed that majorities are less likely to abuse their power over minorities. Ensuring wide access to property would therefore buttress equality of political rights. The American founders understood this well. As John Adams put it, Let us first Suppose, that the whole Community of every Age, Rank, Sex, and Condition, has a Right to vote. . . . We may advance one Step farther and affirm that the Ballance of Power in a Society, accompanies the Ballance of Property in Land. The only possible Way then of preserving the Ballance of Power on the side of equal Liberty and public Virtue, is to make the Acquisition of Land easy to every Member of Society: to make a Division of the Land into Small Quantities, So that the Multitude may be possessed of landed Estates. If the Multitude is possessed of the Ballance of real Estate, the Multitude will have the Ballance of Power, and in that Case the Multitude will take Care of the Liberty, Virtue, and Interest of the Multitude in all Acts of Government.7 The Framers tainted these ideals by building slavery into the architecture of the republic through such institutions as the three-​fifths compromise, the makeup of the Senate, and the Electoral College. Even the Reconstruction-​ era amendments formally guaranteeing equal citizenship rights to all persons betrayed these principles further, not only by allowing Jim Crow racial subordination to remain in place for decades, but also by formally exempting the penal system from the ban on “involuntary servitude” in the 13th Amendment.8 The latter loophole has allowed large-​scale use of forced prison labor to flourish to this day.9 Like other systems of coerced labor discussed in Chapter 3, such as plantation slavery and socialist labor conscription, it enables employers to extract rents by holding down labor costs and transferring the costs of maintaining the system of coercion to the public. At the same time, because of its deep roots in the post-​Reconstruction era, the penal labor system continues to serve as a “racialized system of social control,” in Michelle Alexander’s term.10 Liberal democracy requires general recognition that all persons are of equal worth and, as citizens, entitled to equal rights in the political arena. This idea is a late and momentous achievement in the development of human thought. Its acceptance has come not only through the awakening of moral awareness, but also through struggle—​sometimes violent, sometimes through the power of social movements. Its foothold still remains tenuous, particularly in recent years. Fear of a radical overthrow of social power hierarchies underlies much of the resistance to seeing other people in the political community as deserving of equal political rights.

 



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Psychologically, people can justify the denial of political equality if they see others as being different in some fundamental way. The political scientist Robert Dahl cited studies of primate behavior showing that, along with other primates, humans are naturally endowed with a sense of fairness over the distribution of rewards “to others whom they view as comparable to themselves in relevant ways.”11 But accepting that other people should be treated as we would be treated is far harder if we consider those other people as “not like us.” Inequality in social status inhibits our ability to recognize those likenesses. It also invites us to blame those others for their lower status and to commend ourselves on our superiority. Just as the evolutionary biologists claim that we have an instinct for fairness, so too we have an instinct to compare ourselves with others. This instinct appears to be deeply seated in our makeup as social beings. Study after study confirms that how we rate ourselves relative to others, whether we see ourselves as winners or losers or successful or failures, has far more to do with our levels of happiness and life satisfaction than our appraisal of how high inequality is.12 How inequality affects our attitudes also depends on whether we see the current distribution of society’s rewards as fair or not, or ordained by God or nature. Not only our level of satisfaction with life, but our levels of anxiety and psychological health are affected by how we see ourselves on the ladder of life.13 In Europe, countries with higher levels of inequality tend to have lower levels of happiness, lower levels of generalized trust, and higher levels of anxiety about status. This is true for individuals as well. Individuals who feel looked down upon by others, or who feel they are not valued, are less happy—​even controlling for their level of income. So are individuals who feel more mistrustful toward others.14 Inequality, in short, erodes the ties holding members of a society together. When we regard others as inferior by virtue of class, race, religion, ethnicity, gender, or other markers of difference, seeing them as “not like us,” our inclination to demand fair treatment for them suffers. We justify these inequalities on the grounds of some principle of justice—​God or nature or the market or a pattern of poor choices was the reason they are the way they are; we do not demand that they be treated in the same way as we. The inbuilt fairness instinct with which primatologists tell us we are born can be put aside, and we can tell ourselves that what we have we have earned fair and square. The convenience of supposing that those who must work in harsh conditions, at low pay and with little or no control over their work environment, are “not like us” was illustrated in the notorious comment by Wisconsin Supreme Court chief justice Patience Roggensack in May 2020 at the height of the Covid-​19 pandemic. Her remark occurred during oral argument on a case asking the court to invalidate the governor’s stay-​at-​home mandate. The attorney arguing for the governor’s order cited the rapid spread of the virus in Brown County, Wisconsin, where several meatpacking facilities had experienced an explosive increase in virus infections,

 

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as a justification for the order. The judge objected that “these were due to the meatpacking, though. That’s where Brown County got the flare. It wasn’t just the regular folks in Brown County.”15 Her casual psychological relegation of meatpacking workers to the status of “not regular folk” suggests how reflexive these instincts can be. Adam Smith recognized this point as well. He worried that our wish to identify ourselves with the rich leads us to disdain the poor. Where inequality is moderate and gradual, Smith believed that it benefits society by encouraging enterprise. When inequality becomes extreme, however, it distorts public morals by tempting us “almost to worship” the wealthy and to neglect the poor.16 Smith believed that when we seek to attract attention by vain and ostentatious consumption, we degrade ourselves. He observed “that wealth and greatness are often regarded with the respect and admiration which are due only to wisdom and virtue; and that contempt, of which vice and folly are the only proper objects, is often most unjustly bestowed upon poverty and weakness.”17 In Chapter 2, I mentioned the Euripides fallacy that occurs when we attribute exceptional talent to people because we observe that they are successful. On the other hand, as we compare ourselves with those we see as being above us, if they are far above us, we may feel demoralized and resentful rather than to look up at them as role models.18 Correspondingly, those with wealth and power fear that extending full political rights to outsiders—​racial minorities, the propertyless, and other excluded groups—​would cause a social upheaval and a violent redistribution of wealth.19 They often justify their privileges through ideologies that make their circumstances seem fair and reasonable. The next section points to a few examples from American history.

10.2.  Ideologies and Collective Self-​Interest History has known many doctrines that seek to justify the denial of political equality to others. Doctrines of the 19th and 20th centuries ranking social worth around hierarchies of race, sex, nation, and class rationalized the privileges of the fortunate. In the 19th century, White intellectuals not only debated whether Blacks were entitled to the same political status as Whites, but even whether they had souls. Scientists debated whether the human races were all descended from a common ancestor, in which case racial differences owed to different rates of degeneration, or whether the different races had been endowed from the start with different qualities.20 Belief in fundamental qualitative differences among the races was prevalent even among many abolitionists. Not until the Civil Rights Act of 1866 was the concept of citizenship divorced from race.21

 



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Political equality of Blacks and Whites remained unrealized in practice, however, in much of the country, since the federal government generally refused to enforce the principle until late in the 20th century. On the other hand, the Supreme Court routinely extended constitutional rights under the Due Process Clause of the 14th Amendment to business corporations on the grounds that they were mere “associations of persons.” The Citizens United decision reflected this line of reasoning in affirming the free speech rights of corporations, repeatedly referring to the corporation as “an association that has taken on the corporate form.”22 The belief in a natural hierarchy of races remained ingrained in America until Naziism discredited it among polite society. It not only shaped race relations, but also shaped immigration policy. Little more than a century ago, Senator Henry Cabot Lodge, father of Richard Nixon’s vice presidential candidate in 1960, declaimed on the floor of the Senate in favor of a bill that would apply a literacy test so as to restrict immigration to the United States on the part of “non-​kindred races”: There is a limit to the capacity of any race for assimilating and elevating an inferior race; and when you begin to pour in in unlimited numbers people of alien or lower races of less social efficiency and less moral force, you are running the most frightful risk that a people can run.23 Such convictions remain deeply entrenched still. Those holding them constantly find new evidence to affirm them; for example “those people” are having too many babies; “they” are burning down our cities; “they” are bringing crime and disease; “they” are coming across the border in caravans. So, while as a constitutional principle, political equality is established in the United States and other democracies, as a working principle, it remains far from realization. Those whose resentment over feeling mistreated often explain their circumstances by blaming others. But fearing how redistribution would affect them, many prefer to blame government or liberals, immigrants or globalization for their problems.24 Girded with ideologies of White supremacy and hatred of liberals, these are the sentiments fueling the efforts to disrupt democratic procedures by violence, as was seen among the Trump-​supporting mobs that invaded the US Capitol and several state legislatures on January 6, 2021.25 The division of labor that relegates the poor, and above all Black and Hispanic workers as well as immigrants, to menial, low-​paying jobs, reinforces the line between “us” and “them.” In particular, workers in some jobs must often commit, or at least tolerate, practices that are morally degrading. For example, poorly trained and poorly compensated prison guards may express their sense of humiliation by acting punitively toward inmates. The staff at residential care facilities for the

 

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mentally or physically disabled or the elderly often take out their resentments on those they care for, who are the most vulnerable to abuse. Status hierarchies reinforce the separation of those to whom unpleasant menial work is invisible and those performing it.26 An ideology functions not only to organize ideas into a consistent and coherent logical system. It also makes a particular set of actions appear both rational and just and serves to demarcate boundaries between groups. Where a group identity is strongly felt, the identity often attaches itself to a higher cause. Adherence to the cause signals adherence to the group; dissent from the doctrine signals disloyalty to the group. The ideology then becomes a rationalization of the bonds tying the group’s members through a shared social identity. Polarization tends to harden the lines between “us” and “them,” and those monitoring the boundaries can readily observe whether the members’ utterances conform to the signs and symbols of the group’s identity. Those monitors may be officials in charge of maintaining ideological uniformity, as in the party officials and censors of a totalitarian regime, but may also be voters in a world of polarized media and social media, and donors in a world of intense ideological conflict. A prime minister can readily distinguish between “wets” and “drys” among her cabinet members, and an ideologically motivated funding organization can determine from the voting record whether a politician is sufficiently militant in defending its interests. A political figure who strays too close to the moderate middle runs the risk of being outbid for the donor’s support by someone who takes a more extreme public position. It does not take long in the process of radicalization for ideology to depart from any willingness to compromise for the sake of enacting policy, and to become instead a means of demonstrating intense, unswerving loyalty to the supporters and donors of their cause. Polarization has done immeasurable damage to American policymaking by sacrificing the capacity to reach majority-​supported, median-​voter decisions because it requires politicians to give priority to position-​taking and political signaling.27 Racial identity, always a central cleavage in American politics, is being mobilized anew to mark a social and political identity. White racial identity has merged with a broadly anti-​redistributive economic agenda although, as in the case of Donald Trump’s supporters, that agenda has lost most logical consistency—​Republican base voters have no interest in losing their Social Security and Medicare benefits. Trump was particularly skillful at exploiting status anxieties among White voters on issues loaded with symbolic significance for cultural and racial identity—​immigration, trade, and race.28 A survey conducted by the University of Massachusetts, Amherst, found a powerful association between racial attitudes and beliefs about the legitimacy of Biden’s election. Among those agreeing that White people have advantages because of race (who totaled 58% of their sample), 87% accepted Biden’s victory as legitimate

 



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and regarded the events of January 6 as an insurrection. Only 21% of those disagreeing with the proposition consider Biden’s election legitimate and 10% were willing to call January 6 an insurrection. Table 10.1 summarizes the results of the survey. The racial identity aspects of right-​wing populism then ally with an unwillingness to levy taxes and spend money for the provision of public goods in support of the privatization of public goods—​even when, as Heather McGhee points out, lower-​income Whites also suffer from poor schooling and shrinking access to medical care. The merger of the racial and cultural identity lines with a broad if inconsistent antagonism to taxes then undermines public support for taxing and spending on public goods and wider insurance pools. The harder it is for people to accept those they see as being above and below them as being like them, the less likely they are to support broader spending on public goods if they believe that those who are undeserving will benefit from them.29 As a result, those public institutions that formerly serve to equalize opportunity and foster mobility have lost much their capacity to do so. As Chapter 5 showed, the quality of schools, healthcare, public amenities, and public safety differs more and more sharply across neighborhoods and regions. The smaller the share of middle-​class neighborhoods in towns and cities, the more the inequality gap reproduces itself Table 10.1: Associations between Racial Attitudes and Responses to Results of Presidential Election in 2020 Do white people have advantages because of color of skin? All respondents

Biden victory legitimate

January 6 an insurrection

Agree

58

87

70

Neutral

15

44

26

Disagree

26

21

10

Are racial problems more than rare, isolated incidents? All respondents

Biden victory legitimate

Agree

60

81

Neutral

15

35

Disagree

25

13

Source: University of Massachusetts, Amherst. “UMass Amherst Poll Examines Americans’ Views of Race Issues Including Critical Race Theory, Systemic Racism and Reparations,” January 14, 2022, https://​pol​sci.umass.edu/​print/​22450.

 

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across generations. Mobility across income levels and geographic units is lowest where incomes are lowest, separating enclaves of disadvantage from areas of growth and opportunity.30 Therefore inequality contributes to political polarization through both direct and indirect channels. Its direct effect is to undermine the public’s support for broad public goods and services. Indirectly, it fosters the segmentation of society into distinct social and geographic enclaves. As the tension around redistribution sharpens due to a rising gap between the top and bottom income groups, it fosters an ideology of antipathy to government, not only to redistribution, but also to public goods and services. It motivates the rich to pour political resources into ideologically oriented organizations, such as right-​wing think tanks, media outlets, law schools, and universities and to funnel political money into lobbying and campaign finance. This redistributive threat motivates ideological activists to recruit loyalists into the executive bureaucracy and judiciary and to manipulate the rules of electoral representation in such a way as to overrepresent the privileged. The effort to privatize formerly public goods, such as education and healthcare, results in sorting the public into sharply opposed partisan-​ ideological camps who reside in different social and geographic enclaves. In turn, this social and spatial sorting has reduced society’s sense of a common interest. It has intensified the long-​standing racial division in the country, as the politically motivated use of the criminal justice system against African Americans has shown. As it widens the distance between the life experiences and opportunities of rich from poor, allowing us more and more to inhabit separate worlds, it also attacks our ability to identify with those that are “not like us,” whether they are different by virtue of race or religion, or are positioned far above or below us on the ladder of life. Inequality shapes our perceptions of the fairness of society, but politicians are adept at playing on these perceptions. Conservative activists are skillful at invoking trigger words that prompt resentment against extending equality of political rights to others, such as “socialism.”31 By privatizing public goods and depriving the disadvantaged of access to publicly provided healthcare, education, and social protection, conservatives can point to the actual experience people have with dysfunctional public services to back up their claims that government is the problem, not the solution.32 Attacks on government as intrusive, on the notion of the common good as socialism, feed the mistrust and polarization that are poisoning our public life. Moreover, the consolidation of the alliance of those with great wealth and populist impulses built on resentment and relative deprivation follows a logical path. The drive to ensure that policy gains are irreversible leads to a continuous widening of the scope of strategy as its leaders work systematically to deprive potential opponents of political resources, among them voting rights, access to public goods, and even belief in science and reason. At the same time, each

 



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generation of leaders must fortify its flanks against threats from forces further to the right—​including armed extremists—​driving the movement ever further to the extremes as insufficiently moderate figures are pushed aside by more radical figures who outbid their predecessors by appealing to tribal solidarity.33

10.3.  Polarization and Extremism At the federal level, the polarization of parties in Congress results from two related processes, the movement of the Republicans in the House and Senate toward extreme right-​wing positions together with the greater voting cohesion on the part of both parties. Together, this process has resulted in Congress’s frequent efforts to block legislative initiatives from Democrats in Congress and, when they hold the White House, from the president. Refusing to enact even modest steps toward reducing the imbalance in material and political resources and passing only measures that deepen it reflects the policy achievements of conservatives over the past decades. Even when in the minority, Republicans can rely on the power of the filibuster and the conservative tilt of Republican-​packed courts to enact their policy agenda of restricting the franchise, reducing government regulation of business, and expanding private property rights. This strategy underlies the sharp increase in the use of the filibuster in the Senate and the acceleration of right-​wing judicial appointments under Republican presidents.34 We must be careful to distinguish the growth of polarization from the growth of extremism, although both reached a pinnacle in the era of the Trump presidency. Although the ideological agenda of the conservative-​corporate alliance that has gained dominance in the contemporary Republican Party is much more extreme than was the policy orientation of Republicans of the 1950s and 1960s,35 polarization is more a matter of the 40-​year sorting of citizens into two political camps than it is of the movement to the extremes.36 Chapter 2 pointed out that inequality is playing out not only in the way incomes and wealth are distributed across social groups, but in the places where people live as well. In this section I show that the overlap of geographic with socioeconomic inequality is affecting partisan attachments and attitudes, particularly on the types of issues that invoke social identities. Spatial sorting occurs not only as people choose to move away to other places or to remain in the same place.37 Common exposure to economic prosperity or decline within a neighborhood or town also tends to reinforce inequality in income and opportunity over time as the quality of local schools and public amenities becomes more uniformly good or poor. The life experiences of those in particular places become more similar to one another, but more different from those living in other places. Therefore, as fewer and fewer neighborhoods and towns have a mixture of rich and poor residents,

 

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and become more homogeneous in economic and social conditions, inequality reproduces itself.38 Sorting by geography and by media attention reinforces extremism by reducing exposure to other points of view and encouraging an outbidding process by those claiming to be the most zealous defenders of the cause. For the same reason, polarization encourages political leaders and media entrepreneurs to adopt extreme positions to attract support. The algorithms that social media platforms use to drive attention reward provocative content because and feed users more of it.39 For right-​wing politicians, extremism is also profitable because it attracts funding from right-​wing donors. Republican extremism became an explicit strategy under Newt Gingrich, who ascended to power within the Republican House caucus by rejecting the moderation and openness to compromise of previous Republican House leaders. As Gingrich explained in a speech to the Heritage Foundation in 1988, “This war has to be fought with a scale and a duration and a savagery that is only true of civil wars.”40 Gingrich united the Republicans around the idea that the use of legislative obstruction and intransigence would be more electorally rewarding than would winning policy concessions through compromise with the Democratic majority. His strategy appealed as well to the wealthy conservative donors and to hard-​right media organizations, such as the nationally syndicated Rush Limbaugh show, which also launched in 1988. Gingrich’s strategy enabled him to lead the Republicans to a majority in the House of Representatives in 1994, the first time in 40 years they had held a majority.

10.3.1.  Geographic Sorting An important concomitant of inequality is geographic sorting. As I noted in Chapter 2, the more fine-​grained the geographic units we use to compare territorial units, the more we find homogeneity within units and divergence across them. For example, differences in health and well-​being are far wider when we look at the roughly 74,000 census tracts in the country than if we compare counties, of which there are roughly 3,100. The range of life expectancy at birth from highest to lowest is 40 years across census tracts, 20 years across counties, and 7.5 years across states. As economic and social sorting increases over time, it sharpens differences across geographic units while reducing differences within them. The smaller the scale of aggregation, the more clearly defined are the differences across units and the smaller the differences within them. This is true for income, health, and many other indicators of economic and social well-​being. Not only is this the case at any one point in time, but the differences across places are growing over time.

 



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To illustrate this, let us consider county-​level variation. Counties vary widely with respect to demography, health levels, political behavior, incomes, and income inequality. Mean life expectancy varies by 20 years, household income by 6.7 times, and income concentration at the top by 12.2 times. Trump’s 2020 vote share varied by nearly 18 times. And counties tended to be overwhelmingly either strongly pro-​Trump or strongly pro-​Biden; relatively few counties had relatively equal numbers of both camps. Sorting—​even broken down by the relatively large aggregate geographic units of counties—​is strongly associated with a number of social characteristics. Even the likelihood of getting vaccinated against Covid-​19 is correlated with county of residence. The same pattern of social and ideological sorting that we observe across counties is also strongly related to variation in levels of vaccinations as of August 24, 2022. Figure 10.1 shows that once we control for median income, the top 1% income share, life expectancy, and percentage Black, all of which have been linked to public health, we can explain nearly 60% of the variation in vaccination levels. This means that a county with a 20% higher Trump vote, holding income, inequality, life expectancy, and Black population share constant, is likely

Percent fully vaccinated, by county, as of August 24, 2022 by trump vote, 2020 all else equal, a 20% higher trump vote implies 12.3% fewer vaccinations 100 r-sq = .588; sig = .0000 controlling for median income, percent Black, top 1% income share, and life expectancy

Percent fully vaccinated

80

60

40

20

0

.2

.4

.6

.8

1

Trump vote, 2020 Source: CDC [https://data.cdc.gov/Vaccinations/COVID-19-Vaccinations-in-the-UnitedStates-County/8xkx-amqh]

Figure 10.1:  Covid-​19 Vaccination Rates, by County, as of August 24, 2022, by Trump Vote, 2020

 

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to have an 12.3% lower vaccination rate.41 Whatever factors at the county level drove the Trump vote also have affected people’s willingness to be vaccinated against Covid. In short, the neighborhood the people live in is related to attitudes and behaviors shared among them. Pathbreaking research by Raj Chetty and his colleagues has found that the level of social capital in a neighborhood, as measured by the number of connections people have crossing social class lines, has a strong statistical relationship with the rate of upward economic mobility in that neighborhood. Breaking down the American population geographically by zip code, his team found that a neighborhood where more people from lower-​income backgrounds had social ties to people of a higher income—​the researchers used Facebook friendships to measure this—​the higher the rate of upward mobility of people from that area.42 Facebook friendships of course are only an indirect indicator of the opportunities people have to interact with others who are of different social backgrounds. However they occur, those channels of interaction can supply information, encouragement, and connections that in turn can help low-​income children overcome obstacles to upward mobility.43 Geographic sorting has become more and more important for American politics and policy as counties have grown more homogeneous politically. Over the last 20 years, from the 2000 presidential election to the 2020 presidential election, there has been a steady decline in the number of counties where the difference between the vote share for the Republican presidential candidate and the Democratic presidential candidate was no more than 25 percentage points. Meantime there has been a steady increase in the number of counties where the Republican or Democratic presidential candidate won by even wider margins. More precisely, the number of counties where the difference between the Republican and Democratic votes shares was no more than 25 percentage points fell by more than half, from 1844 to 899.44 The number of counties with extremely high vote shares for the Republican or Democratic presidential candidate rose steadily. Taking the difference between the Democratic presidential vote share and the Republican presidential vote share, in 2000 the 10% of counties with the lowest Democratic vote margin in presidential voting had a Republican advantages of 48.3 percentage points or more. But in 2020, they had Republican advantages of 67.5 percentage points or more. In 2000, the 10% of counties with the highest Democratic vote margin had margins higher than 11.5 percentage points. In 2020, they had margins of 15.2 percentage points or more.45 The relationship between income level and partisanship at the individual level is different from the relationship at the aggregate level: poorer individuals on the whole are still more likely to vote for Democrats than for Republicans.46 But poorer places are different. In the poorest counties, median household income

 



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Distribution of counties by Republican presidential vote share, 2000, 2004, 2016 and 2020 more and more counties produce large Republican majorities while the Republican share of popular vote has hardly changed 4 Republican popular vote share, national

Density of distribution

3

2000: .479 2004: .507

2000

2004 2016 2020

2008: .456 2

2012: .472 2016: .461 2020: .467

1

0 0

.2

.4 .6 .8 Republican presidential candidate vote share, by county

1

Source: Dave Leip’s US Election Atlas

Figure 10.2:  Changing Distribution of County-​Level Presidential Voting, 2000–​2020

level has no relationship to voting for Trump in 2020, after the 2000 Bush vote is held constant. Clearly, the effects of living in particular communities mediate individual-​level influences on political behavior. Geographic sorting therefore helps explain the paradox that voting behavior at the level of counties has changed much more than it has at the national level. The movement in the vote shares for Republican and Democratic presidential candidates in the last 20 years has been slight, while the change in the patterns of voting by county has been dramatic. County-​level results are increasingly skewed, whereas nationally, the country is still rather evenly divided between Republican and Democratic voters. See Figure 10.2. In short, the further down in the layers of geography we drill, the wider the differences in economic, social, and political conditions across units and the smaller the range of variation within them. The smaller the geographic unit and the more homogeneous the social conditions, the stronger the effects of place on individual behavior, attitudes, health, and opportunity. To the extent that we have segmented ourselves into different living environments, we replicate inequality over both space and time. We also widen the social and cultural divisions separating rural and urban communities, racial and ethnic groups, rich and poor, that drive political polarization and extremism.47

 

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10.3.2.  Sociopolitical Sorting Polarization also characterizes sorting into ideological subcultures. Both at the mass and elite levels, the Republican Party is more ideologically driven than are the Democrats, but homogeneity of outlook and living conditions has increased among both parties’ followers.48 As a result, partisan identity is bundled closely with other social identities that divide us along racial, religious, and geographic lines.49 Among Republicans, more than among Democrats, partisan loyalty is reinforced by the combined influence of right-​wing radio, television, newspaper, and social media content on voters and politicians.50 Politicians who fail to toe the ideological line are punished.51 Moreover, as the parties have moved away from one another on policy issues, each party’s followers are coming to view the other party with deep mistrust and even hatred, to the point of regarding them as dangers to the country.52 Emotional antipathy to the other camp is accompanying political sectarianism. At the fringe, sectarianism has led to violent extremism of the kind demonstrated by the storming of the US Capitol on January 6, 2021. Much evidence supports the idea that the felt loss of status, not so much in economic terms as in reference to the traditional hierarchies of social prestige marked by the old racial order and America’s dominant place in the world, is driving the mobilization of Republican voters.53 This helps explain the fact that racial anxiety and resentment were much more strongly associated with support for Trump than was material deprivation, and that many Republicans who had traditionally opposed protectionism supported Trump. Hierarchies of income do not always coincide with hierarchies of social esteem. In fact, as I noted above, relative deprivation can arise from the sense of lost social position and respect even when incomes rise.54 Among many Whites, the fear of the consequences of losing their demographic majority has produced resentment and anger, far more among Republicans than among Democrats. As of the end of 2021, two-​ thirds of Republicans agreed with the proposition that that “the growth of the number of immigrants to the U.S. means that America is in danger of losing its culture and identity.” Only 13% of Democrats accepted this idea. Likewise, 66% of Republicans agreed that “the Democratic Party is trying to replace the current electorate with voters from poorer countries around the world,” whereas only 12% of Democrats agreed.55 Some Republicans have begun to make overt appeals to White racial identity in order to attract votes.56 As American politics becomes ever more polarized around racial and ethnic division, our politics is becoming more and more factionalized. This is making society susceptible to extremism, violence, and even civil war.57 Rising partisan sectarianism means more and more Republicans and Democrats view the other party “as essentially different or alien” and even

 



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“iniquitous.”58 Because the attitudes feeding these attachments are grounded in deep emotional identifications and antipathies, they can lead people to switch their policy preferences in order to reinforce their loyalty to their side. Instead of acting like the “rational actor” of the median voter models discussed in Chapter 5, where voters choose dispassionately among candidates and parties based on a calculation of the relative closeness or distance of the candidate’s positions to their own, real voters more and more choose according to their social identity.59 For many voters, partisan loyalty is more a matter of antagonism to the other camp than a deliberate preference for the policy views of their own.60 This “affective polarization” and “negative partisanship” is by no means a new phenomenon in the Trump presidency. It has deep roots in American society, but it has been steadily growing since the 1980s, and accelerated after the mid-​2000s.61 Trump manipulated it and benefited from it, but its rise in recent decades has been accelerated by deepening economic inequality and the alliance of powerful corporate interests with policymakers. One of the most damaging effects of polarization is to trigger authoritarianism. The authoritarian outlook consists of a bundle of attitudes—​intolerance toward others and intense fealty to one’s own group; a preference for autocratic rule; a desire to punish those who violate moral norms; a strong preference for order and discomfort with moral or cognitive ambiguity; and an attraction to the use of violence.62 The views of authoritarians are organized less by logical consistency than by an emotional identification with and faith in trusted information sources; inconsistencies are kept at bay by compartmentalizing logically incompatible convictions.63 The authoritarian disposition encourages people to filter out information at odds with their core beliefs, while adhering to a nonrational faith in a revealed source of truth. This makes them susceptible to lies and conspiracy theories promoted by the sources they trust.64 As Hannah Arendt put it in her famous study of the origins of totalitarianism, “In an ever-​ changing, incomprehensible world the masses had reached the point where they would, at the same time, believe everything and nothing, think that everything was possible and that nothing was true.”65 Recognizing the power of appealing to the authoritarian disposition, antidemocratic leaders are adept at manipulating these impulses. Chapter 7 noted that Putin used state media to undermine beliefs about what was true and what was not. The desire to stage-​manage reality is not confined to Putin’s Russia, however. The George W. Bush administration took the same view. In 2002, one of Bush’s senior aides called in a reporter to explain, “We’re an empire now, and when we act, we create our own reality.”66 Authoritarian leaders work to create a polarized environment that fosters fear, confusion, hostility to nonbelievers, and a willingness to believe conspiracy theories. Donald Trump appealed to this impulse more fully and more

 

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successfully than any previous president. Research shows that nearly all of those displaying the authoritarian outlook in 2016 were Republicans, and among them, Trump had greater support than did any other Republican candidate. Surveys during the 2016 presidential campaign revealed that those Republicans preferring Trump to other candidates were much more likely to be right-​wing authoritarians.67 As candidate and as president, Trump skillfully played on several of the themes outlined here: identification on the part of those resentful at feeling themselves losers or suckers with a candidate claiming to be a billionaire; a desire to punish and exclude “others”; a rejection of universalistic values including faith in science and reason; moralized contempt for the other party. At the same time, Trump’s victory would not have been possible without the active efforts of the wealthy, organized groups that funded his campaign, often through dark money contributions. However much the wealthy may have considered Trump’s style graceless, they considered him vastly preferable to a victory by a Democrat. A New Yorker article quoted one billionaire in Greenwich, Connecticut, explaining his support for Trump: “When the choice is between two ideologies, then it’s a luxury to dwell on the personalities of the candidates. It’s a luxury that we cannot afford.” For him and his fellow billionaires, the choice was between “a high degree of government regulation or a diminished amount of government regulation, because, basically, that’s how the U.S. will get to socialism—​increasing government regulation.”68 Political scientists have shown that authoritarianism is not simply a bundle of outlooks. Rather, it results from an interplay between a person’s underlying personality predisposition and the activation of perceptions of an external threat to the moral order.69 The triggers that arouse the sense of threat can be invoked strategically, as when politicians deploy codewords as cues. Recurrently fruitful ones in American public life have been “communism,” “socialism,” and “elites.”70 So have cues related to racial resentment and anxiety. Likewise, fears that the country is being overrun by immigrants triggers security fears that Trump skillfully exploited.71 To the extent that American society is sorted into separate, self-​ enclosed subcultures of emotional and ideological identity, it deprives voters of a common fund of knowledge and experience. By reinforcing polarization, inequality therefore contributes to sectarianism, authoritarianism, and extremism. A 2016 poll by Vox suggests what some of the cues are that invoke the sense of threat among those predisposed to respond with authoritarian attitudes. Perceptions of danger are colored by culture and ideology.72 Those who score high on the authoritarian index, for example, are much likelier to cite the risk of being attacked by ISIS than are those scoring low. Similarly, those with high scores on the authoritarianism scale consider the threat to them from gun violence to be lower than do those lower on the authoritarianism scale.73 These perceptions of risk appear to be shaped far more by identification with an ideological camp

 



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than by a disinterested calculation of risk. Indeed, anthropologists such as Mary Douglas have shown how strongly our perceptions of danger are mediated by culture, which in turn is shaped by the structure of society. Republican candidates have routinely employed the language of fear and threat to activate support for their candidates and fear and loathing for their opponents. Examples include Newt Gingrich’s list of scare words that Republican candidates were instructed to use against their Democratic opponents in 1994, words such as “betray, bizarre, decay, destroy, devour, greed, lie, pathetic, radical, selfish, shame, sick, steal, and traitors.”74 This use of trigger language continued with Ronald Reagan’s “war on drugs” in 1982, Sarah Palin’s “death panels” in 2009, and Trump’s claims in 2015 that the Mexican government was sending “the bad ones over.”75 “Socialism” and associated terms—​communism, Bolshevism, “pink,” and so on—​have proven a reliable and durable bundle of scare words in American politics for many decades. Among Republicans who have made demagogic use of trigger words, Trump has been particularly effective. For example, at the 2020 Republican National Convention, Trump proclaimed that this election would determine whether we save the American Dream, or whether we allow a socialist agenda to demolish our cherished destiny . . . whether we rapidly create millions of high paying jobs, or whether we crush our industries and send millions of these jobs overseas . . . whether we give free rein to violent anarchists, agitators, and criminals who threaten our citizens . . . whether we will defend the American Way of Life, or whether we allow a radical movement to completely dismantle and destroy it.76 Terms like “death panels,” “caravans” of criminally minded Mexicans, and “socialism” affect the way people think about substantive policy issues such as federally subsidized health insurance, immigration policy, and taxation. Such symbol-​infused language evokes deep-​seated, socially shaped anxieties and deepen partisan-​ideological polarization. Polarization that runs down to deep emotional core layers helps account for the fact that outlooks on such basic facts as the outcome of the 2020 election, the reality of climate change, and the danger of the Covid-​19 pandemic are closely aligned with partisan affiliation. A month after the November 2020 election, fewer than one-​quarter of Republicans accepted the results of the election as accurate. Similarly, while in 2001, 53% of Republicans believed that changes in the earth’s temperatures over the past century were due to human activity, by 2016 that figure had fallen to below 43% (among Democrats, the percentage rose from 70% to 84%). Attitudes toward the Covid-​19 pandemic were likewise polarized: among Republicans, the number concerned about the virus fell

 

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from 88% to 79% from April to September 2020, and the number approving of canceling large gatherings fell from 81% to 58%.77 In June 2020, as conspiracy theories were circulating about Covid (such as the idea that it was intentionally planned by powerful people), 25% of the population believed the theory was true or probably true. But there was a strong division among respondents. Among Republicans and people who leaned Republican, 34% thought the theory was definitely or probably true, while 29% thought it was definitely or probably not true. Among Democrats the percentages were reversed—​18% thought it was true, 44% said it was not.78 Among people with a high school education or less, 48% accepted the theory as probably or definitely true. Conspiracy theories about Covid are more widespread in the United States than in other developed democracies. Researchers found that in Germany, no more than 15% of the population “somewhat agreed,” “agreed,” or “strongly agreed” with the assertion that the coronavirus was part of a global effort to enforce mandatory vaccinations.79 Another study found that the United States ranked higher in conspiracy thinking about Covid than such peer countries as Great Britain, Belgium, Switzerland, and Canada.80 Conspiracy thinking in Russia is still more widespread.81 One survey in 2018 found that two-​thirds of the Russian public believed that there was a “world government,” among whose members were oligarchs and politicians from various countries (although not Russia).82 This widespread belief helps explain Russian conspiracy thinking about the Covid virus. In 2021, 64% of the Russian public believed that Covid was developed as a biological weapon.83 As in the United States, conspiracy beliefs about Covid were associated with low trust in government, reliance on the social media for news, and conservative values in the sense of higher respect for the authorities and a moralistic basis for loyalty to one’s group.84 The United States is certainly not alone among the developed countries in experiencing a rise in populist authoritarian movements as a result of inequality, globalization, and technology change.85 In Europe also, right-​wing populism is fueled by the downward mobility of middle-​income segments due to deindustrialization, offshoring, automation, and the perception of cultural and economic threat from immigrants. Studies from Britain show that one of the strongest predictors of support for Brexit was the sense of insecurity among social groups with an intermediate position in society whose material positions were slipping (many working-​class voters also voted for Brexit). It was among those with intermediate levels of education and occupation (those with A-​level degrees, equivalent to an associate degree in the United States) whose material position had deteriorated where support for Brexit was greatest.86 Another study found that it was middle-​class groups whose livelihoods were being made insecure by automation and outsourcing who were the drivers of support for right-​wing populist parties in Great Britain, Germany, and Switzerland.87 Similarly, Noam Gidron

 



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and Peter Hall found that the surge of right-​wing populism in Europe can partly be ascribed to the loss of social status and security that has accompanied globalization and technological change. Significantly, the feeling of social marginalization is higher among people with lower incomes in all countries surveyed—​but it is higher in general in countries with higher levels of income inequality.88 For Germany one study finds evidence that it is the decline of “regions that once mattered” but no longer do not where voting for right-​wing populist authoritarian parties is strongest in Europe.89 Can we conclude that voters who identify with “left behind” groups vote for oligarchs claiming to represent the people? People understand what their interests are in different ways. Frequently people interpret their material interests through an identification with those whom they consider to be like them.90 Right-​wing extremists have succeeded in mobilizing White voters across class lines around hatred and resentment toward cosmopolitan elites identified by simple tags such as “liberals.” The projection of fears over status loss onto targets that symbolize threats to social identities helps explain this tactic. As so often in the United States, the racial division has enabled wealthy White interests to draw poorer Whites to their cause.91 The effects of globalization, immigration, and geographic sorting have likewise reinforced the overlap of material and cultural identities. The effects of rising economic inequality, therefore, are mediated through processes reshaping nonmaterial social identities. The alliance of wealth and power draws both on ideological doctrines and emotional impulses to mobilize its adherents. These include ideas familiar from the long debate over the proper role of government in society, the relative importance of capital and labor in creating economic value, the importance of property rights vis-​à-​vis the claims of society, individual freedom versus the common good, political and economic freedom, social and political equality, the “natural hierarchy of races.” Those holding power invariably find ideological justifications for their right to rule; those opposing them seek to build a counterideology.92 In the era of conservative ascendancy since the early 1980s, a set of doctrines based on laissez-​faire theory provided an intellectual rationalization for a policy course encouraging massive rent-​seeking through suppressing workers’ bargaining power, acquiring administrative monopolies over the provision of services, dismantling many of the regulatory rules established in the mid-​ 20th century to check unbridled corporate power, manipulating the tax system, and overriding laws intended to promote competition in the face of abuses of market power. They demolished the postwar consensus around the importance of balancing individual freedom against the public good. Such doctrines continue to have a powerful grip on policymakers and economists. An unquestioned faith in the laissez-​ faire ideology underlay Margaret Thatcher’s ex cathedra pronouncement, “There’s no such thing as

 

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society,” which I cited in Chapter 3. Economists search ex post facto for evidence confirming their belief in the “marginal product theory of wages,” which posits that actual wage determination deviates only modestly from the perfectly competitive labor market setting in which wages are set at their marginal product. Some economists try to explain the high compensation packages of CEOs by falling back on the default assumption—​which they consider a natural law—​ that the market for talent explains most of the increases in pay at the top.93 For many economists, such reasoning is “natural” because their default assumption is that the market-​driven theory of wage determination must be correct. Evidence must be fit to the assumption rather than used to test alternative explanations, including those stemming from national-​level institutions that encourage rent appropriation from market power. Assumptions that market forces are the main factor explaining inequality then spread out more broadly into public opinion and shape theories of “the knowledge economy” and the “rise of meritocracy.”94 But as the evidence presented in this book shows, power relations in society shape the way economic forces work. An unquestioned belief in the power of markets to allocate resources fairly and efficient also underlay the support for trade agreements among Republicans and Democrats in the 1990s and 2000s. Conservatives viewed globalization as a weapon to hold down workers’ wages. In 2007, for example, Alan Greenspan argued that opening the borders to high-​skill workers from the rest of the world would simultaneously lower the high wage levels in the United States and equalize wages between high-​and low-​skill workers.95 However, moderate “third way” Democrats also embraced globalization. They put up only feeble resistance to Republican efforts to strip out compensatory measures such as active labor market policies and unemployment support from trade bills in the belief that trade would yield many more winners than losers.96 Without a comprehensive effort to offset the job losses from global trade, including assistance in obtaining retraining and job placement, the effects of globalization are concentrated on those least able to adapt. One consequence of the faith that expanding global trade would ultimately benefit everyone was large-​scale loss of employment, security, and dignity from offshoring and automation. The concentrated effects of trade shocks have in turn contributed to the surge of right-​wing authoritarianism that I described above.97 It has also reinforced the concentration of the income gains at the very top of the income distribution. Liberalization in the United States, Russia, China, and Germany was carried out in societies marked by deep histories of political and social inequality. These included centuries of slavery in the United States and even longer centuries of autocracy in Russia and China. Germany’s recent history had featured the totalitarian dictatorship of the Nazi regime, a brief and failed attempted at democracy in the interwar period, and centuries of feudalism and imperial autocracy.

 



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To suppose that unleashing market forces in societies so profoundly marked by hierarchies of status and power would free everyone to participate as equals in the marketplace was an ideological presumption convenient to its sponsors by unsupported either by evidence or common sense. History embeds power and advantage in the structure of social relations. In the United States, the effects of White racial supremacy in patterns of society have lasted long after segregation and Jim Crow were formally eliminated. In the pattern of segregated residential neighborhoods, for example, as Richard Rothstein showed, “Seemingly ‘race-​neutral’ programs have reinforced the disadvantages of African Americans that were initially created by race-​conscious housing policy.”98 To imagine that the working of markets is “natural” ignores how they are shaped by the distribution of resources in which they operate. To assume that market liberalization will open opportunity equally to all to realize the fruits of their talents reflects a willful blindness to evidence. Without deliberate efforts to ensure some fairness in the opportunity to participate in a market economy, market liberalization will result in a deepening of inequality. Germany’s liberalization might likewise have been doomed to fail as had that of Weimar’s if its cumulative effects had tilted the distribution of wealth and power more and more toward oligarchy. It did not, however. The social market economy ideal of the early postwar years recognized the importance of social justice and took pains to ensure that all major groups in society benefited and sacrificed equally in economic recovery in a basically liberal economy. As a result, the cumulative effect of the postwar opening was to lead to continuous rebalancing of political and economic power across multiple contenders—​large enterprises, the Mittelstand, labor, and others. This contention strengthened pluralism and weakened corporatism. In the United States, the cumulative effects of liberalization steadily strengthened the power of big business and extreme right-​ wing ideologues in the courts, the states, the House and Senate, the media, and the electoral system. No more apt expression of the success of this movement is the entrenched doctrine that “money is speech” enunciated by courts stacked by decades of concerted right-​wing effort. No clearer emblem of its threat to democracy is the presidency of Donald Trump.

10.4.  Necessary Opportunities Let me outline an alternative public philosophy. I offer it not as a comprehensive policy program but as a basis for a different set of default assumptions about the role of a market economy in democracy. To reverse the trends toward inequality I have outlined in this book, we need different operating assumptions about the relationship between the claims of labor and of capital, of individual

 

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freedom and the social good, competition as a force for protecting freedom, and the role of the government in protecting competition. In developing these principles, we can draw on the ideas of the German ordoliberals of the 1930s, American Progressives such as Louis Brandeis, and the Framers of the United States Constitution. In the last chapter, I discussed the ideas of the ordoliberals of the 1930s, which, incorporated into the “social market economy” paradigm in the late 1940s, guided many of the institutional decisions Germany made in the early postwar period. The postwar history of Germany has demonstrated that a prosperous, socially equitable, and democratic society can encourage economic growth without producing oligarchs or penury. The Freiburg school liberals’ thought was influenced by some of the American Progressives, such as Louis Brandeis, but they elaborated a social and economic philosophy for their own time, as an alternative to the prevalent totalitarian ideologies of fascism and communism as well as to the powerful concentrations of private capital in cartels, trusts, and monopolies that had spread across the world. They also had a strong ethical orientation influenced by Catholic social thought and Kantian universalism—​a dimension lost when laissez-​faire neoliberals claimed their heritage.99 They believed that a market economy was shaped by social and political interests that would inevitably attempt to use political power to advance their market power. Accordingly, they believed that government must check any concentrations of market power that threatened freedom of competition. Freedom of contract, the rights of property, and the ability to pursue and enjoy economic gain were all critical elements of a prosperous market economy, but could only be ethically justified—​and sustainable in practice—​to the extent that they allowed all parts of society to benefit from prosperity. It was logical, then, for them to marry their ordoliberal theory of market competition with a comprehensive framework for regulating economic relations that balanced the interests of individuals against the collective good of society. A society in which individual freedom flourished required as a condition that society’s interests themselves be recognized as legitimate. I think we should incorporate these principles into a new public philosophy about the relationship between democracy and the market, individual freedom and the common good. Louis Brandeis also championed a view that remains vitally relevant today. Like Germany’s “social market economy” concept, Brandeis elaborated a “syncretic ideology” (in Gerald Berk’s terms) of “regulated competition.”100 Having represented a number of small business clients, Brandeis recognized the threat posed to market competition and to democracy posed by corporate trusts and monopolies. Because markets were not self-​regulating, he called for a government regulatory role in ensuring that market competition stimulated productivity rather than predation. Supported by President Woodrow Wilson,

 



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Brandeis’s view took form with the establishment of the Federal Trade Commission in 1914. Like the later German ordoliberals, Brandeis also took a broader view of the role of competition in an economy. Not only would free and fair competition tend to induce enterprise and initiative in the economy, he regarded it in moral terms. As Berk puts it, Brandeis’s “first questions about the economy were moral and political, not technical. Did economic arrangements develop independent citizens capable of participating in a vigorous democracy? Or did they lock in power, aggrandize the rich, and dispirit the poor?”101 Brandeis’s philosophy could hardly be more relevant today. We can also draw on classical American ideas about the importance of social and political equality for a democratic capitalist society. The Framers were deeply compromised by their acceptance of slavery, but the principles they proclaimed can be reclaimed for a society that truly believes in the equality of worth of all people. Certainly over our history, at points of severe stress due to high inequality, injustice, and polarization, Americans have reframed our principles so as to ensure that a market economy serves the public good. Madison’s pluralistic vision is a good place to start. Madison and the other Framers who studied the histories of classical republics understood that a concentration of wealth threatened the viability of republican democracy. While a certain amount of inequality in the distribution of resources motivated effort, beyond a certain point it subverted political equality. John Adams wrote, “Property monopolized or in the Possession of a few is a Curse to Mankind. We should preserve not an Absolute Equality.—​this is unnecessary, but preserve all from extreme Poverty, and all others from extravagant Riches.”102 The Constitution incorporated a profound but perhaps not fatal contradiction between the principles of political equality and political liberty that the founders championed and the reality of abject subordination of large sections of the population through slavery. Nonetheless, flawed in realization as it was from the start, the principle of political equality did have some foundation in the reality of a rough equality of property in much of the country. At the time of the Revolution, the top 1% of the White population received around 8.5% of all income (compared to over 18% today, 13% post-​tax).103 Tariffs on imported industrial goods tended to equalize incomes between urban merchants and rural farmers, helping avert redistributive pressure from borrowers and creditors.104 Redistributive struggles, actual and potential, and particularly the deep racial cleavage in American society have shaped the evolution of laws and policies affecting market and political freedoms over the past two centuries. Progressive Era thinking about the dangers of monopoly helped spur legislation designed to curb the abuses of concentrated wealth, a movement given substantial momentum by the Great Depression. Many of the reforms enacted in that era,

 

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recognizing collective bargaining rights of labor, the Social Security system, rules protecting consumers of food and medicine, progressive taxation, regulation of the financial system, were then dismantled after the late 1970s. American history has ample precedent both in constitutional doctrine and in practice for recovering the pluralistic principles articulated but never fully realized by the Framers. Classical pluralists such as James Madison and John Adams, Progressives such as Louis Brandeis, and contemporary liberals such as Robert Dahl and John Rawls have laid the foundation. German postwar histories testify that these principle are compatible with prosperity and political equality, while the outcomes of market transitions in Russia and China, where concentrated private and state power have strangled competition in the marketplace and stifled basic political freedoms, offer a powerful counterexample. In my vision, political equality is not at odds with market freedom, and democracy is not inimical to a capitalist economy. The key is to encourage the principles of a strong government, individual political equality, and a pluralistic dispersion of material resources to reinforce rather than undermine one another. Let me summarize the basic premises of this alternative public philosophy. Political equality is fundamental to democracy, but high concentrations of economic inequality threaten it. Political equality can be reconciled with political and market freedom so long as neither political or market power is too concentrated. The best solution to checking the tendency by those gaining political and market power to claim rents and fortify their positions by curbing competition, therefore, is to encourage the competitive pursuit of material self-​interest as a vital social interest in itself while preventing the pursuit of rents by those with power. Not only would this change the way antitrust law is adjudicated, it would recognize the legitimate claims of workers and of society more generally in our systems of taxation and market regulation. Market competition can be readily subverted when those with power exercise it in such a way as to block rivals rather than to compete freely and fairly on a level terrain. The early public choice theorists offered a model for such rent-​seeking (e.g., by comparing monopoly to theft)—​but when it was the powerful rather than the weak who proved to be the greatest enemies of competition, they forgot the radical implications of their original insights. As the early winners argument described in this book show, the greatest threat to political and economic freedom is not the latent risk that the masses will exercise their democratic rights and rise up to demand redistribution by curbing property rights. It is the reality that those with market power will always prefer to ally themselves when they can with those with political power to suppress competition in both the market and political arenas. More broadly, competition also applies to the arena in which social interests pursue their competing claims. The constitutional principles of a democratic, market-​based order have to be supported by the real distribution of political

 



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resources. Democratic institutions such as elections will be subverted if the groups that gain power from them use their power to render them meaningless. Putin’s regime is a vivid case in point. Therefore to preserve democratic institutions as real arenas of democracy, multiple groups must have sufficient resources to offset one another’s power.105 This is how pluralism—​which Robert Dahl defined as a system of “dispersed inequalities”—​can support a liberal order. This was Madison’s vision. As he recognized, the ideal of political equality is always threatened by hierarchies of social power. Therefore, it can only be protected in a society that ensures that all individuals have necessary opportunities to exercise their rights. So long as government’s power is supported by and in turn supports market and economic competition, there is less chance that its power will become the instrument of those seeking domination. Therefore I do not propose a large-​scale redistributive program as the solution to the problem of rising inequality; both pragmatic and theoretical considerations underlie this conclusion. To reduce the redistributive tension generated by high inequality, the economy must grow, and grow in a way that benefits the broad middle of society and avoids depleting exhaustible resources. It is possible to reconcile the goal of greater equality with that of higher productivity by addressing social and economic policy together. To expand equality of opportunity, we would need to base social policy on a commitment to improving opportunities for meaningful jobs and careers, treating labor as a resource rather than a cost, and converting the nominal belief in the equal worth and dignity of all individuals into actual social and economic practice. Second, we would need to expand the provision of public goods—​reducing those “unnecessary opportunities” that Madison said were enjoyed by those with excessive power by expanding real opportunities for individuals to exercise their rights as citizens and economic actors. Third, we would need to broaden the system of social insurance for healthcare, old-​age income, unemployment, and disability. Finally, we would need an adequate program of social assistance for those unable to support themselves through labor. Although there are fundamental normative questions at stake here, I take the view that this liberal and pluralistic vision benefits society in ways that can be defined and measured. It may help to clarify how these policy principles differ. Social assistance supports people who are unable to help themselves and who have not contributed enough to social insurance programs to maintain a basic standard of living. Social insurance provides protection against the normal hazards encountered over the course of a lifetime. Private insurers always want to narrow the risk pool to those who are least likely to require help. Broadening the risk pool for programs such as old-​age income, medical care, disability care, and unemployment requires addressing the redistributive consequences of a pool that includes higher-​and lower-​risk individuals. To do that brings us back to the basic point of

 

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this chapter: when we see others as like ourselves, we are more willing to share risks and rewards with them. The second point—​expanding public goods—​raises a different kind of redistributive issue. Public goods are financed by taxation, not insurance contributions. They represent a society’s willingness to provide goods that can be shared equally by all, whether any one individual consumes them heavily or not. Because some public goods strongly affect equality of opportunity, a society committed to ensuring that everyone has the ability to start out equal in life must provide public goods such as public education, public healthcare, public safety, impartial law enforcement, and a livable natural environment and make them equally available to all. As Chapters 5 and 6 showed, the worsening quality of public goods in the United States has driven many people to seek the benefits of private goods—​private education, concierge healthcare, gated communities, VIP service. This kind of sorting only deepens inequality of opportunity. The first point concerns how we regard people in the workplace. Recognizing that workers deserve fair treatment and opportunities for careers enabling them to support themselves and their families requires a different balance between short-​term and long-​term perspectives. It may be cost-​effective for a company to pay a worker the bare minimum wage, forcing the person to work two and three jobs to make ends meet and to draw on public assistance, but these practices impose long-​term costs on society. Moreover, considerable research shows that companies that treat their workers better experience lower turnover and higher motivation. One study found that, on average, workers were willing to give up 6% of their wages if they could take a job offering them dignity.106 To the extent possible, we should treat social policy as investment in higher productivity for individuals in ways that raise productivity for society generally. The classic trade-​off between equity and efficiency cannot be avoided, at least at the margins.107 But, as the German case dramatically illustrates, the ideal of the “social market economy” advancing “prosperity for all” is not a contradiction in terms. Realizing it, however, requires deliberately choosing institutions and policies that align the private and public interest. The United States has done so in the past, with policies that made public education through high school free and universal, and expanded access to higher education after World War II for veterans. These helped induce productive investment that yielded returns both for individuals and for society. By raising opportunity for individuals, we reduced status barriers across social groups—​more for class, of course, than for race or gender. Lower inequality in social status, including our perceptions of our own status and that of those in other groups, makes it possible for us to build bonds of affinity and trust.108 As the MIT economist Daron Acemoglu observes, “Our current trajectory automates work to an excessive degree while refusing to invest in human

 



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productivity. . . . Shared prosperity and democratic political participation do not just critically reinforce each other: they are the two backbones of our modern society.”109 Acemoglu argues that technological advances—​such as the dramatic potential of artificial intelligence today—​do not doom us to a world free of human labor, but can be employed in such a way as to make labor more productive and better paid. How we use technology—​whether as a substitute for human labor or as a complement to it—​is a choice we make as a society as government, employers, and workers. In the previous chapter I argued that the institutions Germany has put in place have been conducive to ensuring that employers and employees share in the investment in human potential and share in the returns of the investment. Even facing similar market pressures, different companies in the United States follow very different employment practices. Some, committed to ensuring “good jobs” for their workers, that provide good wages, career advancement opportunity, and a sense of worth discover that the higher labor costs are more than offset by higher productivity and lower turnover.110 The effects of market forces are mediated by policy and institutional choices. Tax and regulatory preferences for automation over employment, which make it profitable to adopt a technology that replaces labor rather than complements it, can be reversed.111 These abstract principles have a number of practical implications for a set of policies that would act to check inequality while encouraging economic growth of the kind that expands the middle class. The following policy ideas are by no means original. They are rather meant to point to some of the many valuable proposals that already exist. I note six points, beginning with those that are less politically unrealistic and ending with larger-​caliber reforms. First, if we accept that people are not commodities and should not be treated as expendable production costs, then we have an obligation to nurture their capacity to create and enjoy value and to participate as equals in the civic life of the polity. This investment can also raise long-​run aggregate productivity. Here we can draw on examples from European societies that regard it as a shared obligation on the part of employers, workers, and the public as a whole to maximize opportunities for dignified employment and opportunities to advance throughout a lifetime. While it is unlikely that the United States will be able to import a German-​style “dual system” of education—​linking schooling with workplace-​based learning—​a number of localities have established institutional arrangements fostering sustained cooperation among employers, schools, and civic leaders to widen educational opportunities leading to meaningful careers.112 The same principle requires us to raise the federal minimum wage to a level consistent with a decent living standard, to enforce rules governing employment relations, and to encourage workers to organize to bargain collectively.

 

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Second, investment in early childhood development is by far the most productive form of investment we can make. The distinguished economist James Heckman estimates that the social return to nurturing children’s development from the earliest ages yields an annual return on investment on the order of 7%–​10% for society in the form of higher educational attainment levels, lower poverty, better career outcomes, and a healthier society.113 Many ways to intervene have been proposed. One is a much larger Child Tax Credit.114 Another is a universal child allowance to replace the existing Child Tax Credit and tax exemption for dependent children. An allowance of $3,000 per year, according to an analysis, would reduce poverty by over 40%, and more for Black and Hispanic families.115 Recognizing the wider society benefits of early childhood development would require us to view of self-​interest in a broader perspective but would strengthen the health of democracy and society. Third, and more politically demanding, are tax reforms that would encourage productive investment, tax overseas corporate profits where they are booked, and restore a more progressive scale of personal income taxation. These do not necessarily include a wealth tax, whose merits are much more debatable.116 As Chapter 4 showed, tax cuts for the rich have not increased productive investment; they have worked only to increase top-​end income concentration.117 Over the past two decades, the IRS has loosened enforcement of tax compliance for those at the top and tightened it for those with the lowest incomes.118 This is neither fair nor efficient. On the other hand, tax incentives for productive investment, and a major national public investment in growth-​stimulating infrastructure, are a means to increase general economic growth.119 Fourth, since competition must be regarded as a cornerstone of a society in which political equality, political and market freedom, and a dispersion of power resources are mutually reinforcing, we need a major shift in antitrust policy. This concerns the defense of market competition both on the part of producers, as well as in the labor market. The emerging “new Brandeis school” of antitrust law has shown that corporations enjoying a dominant market position abuse their power not only if they push an existing rival out of the market. They do so as well when they quash a potential competitor by acquiring it or refusing to transact with it.120 Competition must be protected before it is suppressed; otherwise the rival will never have the opportunity to acquire sufficient market power to demonstrate its viability. This point is fundamentally at odds with the older view that antitrust enforcement should not be used to reduce inequality.121 It does reduce inequality so long as the freedom to compete is protected by law. Better guidance is that offered by the University of Chicago economist Raghuram Rajan: “When we have to choose between competition and property rights, we should invariably choose competition.”122

 



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By the same token, protecting competition in the labor market requires protecting the rights of workers to change jobs, organize collectively, and seek redress of grievances in the courts.123 Monopsony in the labor market—​that is, the power of a single employer to set wages and working conditions when there are no other employers in that labor market—​should be treated as a violation of antitrust law. Fifth is comprehensive reform of health insurance, including rules requiring providers of medical services to publish accurate information about costs and prices and breaking up concentrations of market power in the medical services field, as well as a public option to accompany a universal health insurance mandate. We would need to recognize that the right to healthcare bears directly on liberty.124 Sixth, and still more difficult politically, we must overhaul the system of regulation of the financial industry. In Chapter 6, I outlined some of the ways in which unconstrained financialization has distorted the economy and widened inequality. Again, there are many ideas for remedies. These include a tax on high-​frequency trading (the so-​called Tobin tax), which has been adopted in several European countries, with no harm to capital investment. Joseph Stiglitz has laid out several suggestions, including ending “too big to fail”; regulating the shadow banking system; requiring full disclosure of holdings, returns, and fees by managers of alternative assets; enforcing competition in the credit card industry; and enforcing restrictions on company malfeasance.125 If we use financial instruments to spur private investment in public infrastructure, housing, education, recreation, and other public goods, we need to impose strong checks to prevent abuses. Stiff monitoring requirements would be a good starting point. Simply requiring that investors in partnerships report their income accurately would save as much as $75 billion per year.126 Finally, the principle of political equality rules out treating money as free speech. Money can be concentrated; political voice can only be exercised by citizens as equals. To protect itself, to protect the principle of competition, we must recognize that society must be able to restrict the corrupting influence of concentrated wealth on the exercise of equal political rights.127 These are no more than suggestions of policy ideas developed in much greater depth by others. They are intended as ways to achieve the goal of stimulating growth of the kind that raises incomes in the middle band rather than pressuring low-​end wages downward and concentrating income gains from rents at the top. An expanding middle class reduces inequality simply as a matter of accounting arithmetic. But it does so in a deeper way as well. Growth of the size and security of the middle class would foster a collective stake in the well-​being of the society and a longer time horizon for planning. It would lower polarization and allow us to begin seriously addressing the great global challenges of our time

 

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such as climate crisis, and spreading famine, civil war, and dictatorship. Those with greater economic security would channel fewer resources into extracting short-​term rents and more into productive investment. A model of economic growth that expands the middle class would mitigate the sorting of social groups into separate geographic, social, cultural, economic, and political enclaves. It would ease the redistributive fears and tensions that have motivated wealthy conservatives and populists to join forces in opposing policies intended to expand public goods and political equality. A more equitable sharing of the gains of economic growth would help counter racial division, nativism, and “draining the pool” politics. Americans would be more willing to extend the benefits of prosperity to others less fortunate than we and to pay taxes for public goods and social insurance.128 We would be able to see one another as like members of a national community. These outcomes are by no means guaranteed: to achieve them will require that key stakeholders act with will and courage out of a sense of enlarged self-​interest.

 

NOTES

Chapter 1 1. https://​cdn.cnn.com/​cnn/​2021/​ima​ges/​09/​15/​rel5e.-​.electi​ons.pdf. 2. https://​w ww.brenna​ncen​ter.org/​our-​work/​resea​rch-​repo​r ts/​state-​vot​ing-​bills-​trac​ker-​ 2021. In addition to imposing new limitations on absentee voting, registration, and drop boxes, many bills are giving state legislatures new powers to overturn vote counts by local election officials. “A Democracy Crisis in the Making: How State Legislatures Are Politicizing, Criminalizing, and Interfering with Election Administration,” States United Democracy Center, April 22, 2021, https://​states​unit​edde​mocr​acy.org/​resour​ces/​democr​acy-​cri​sis-​ in-​the-​mak​ing-​how-​state-​legis​latu​res-​are-​polit​iciz​ing-​crimin​aliz​ing-​and-​inte​rfer​ing-​w ith-​ electi​ons/​ 3. Ari Berman and Nick Surgey, “Leaked Video: Dark Money Group Brags about Writing GOP Voter Suppression Bills across the Country,” Mother Jones, May 13, 2021, https://​www.moth​ erjo​nes.com/​polit​ics/​2021/​05/​herit​age-​fou​ndat​ion-​dark-​money-​voter-​supp​ress​ion-​laws/​. 4. Both the attorney general and the head of the Department of Homeland Security testified before Congress on May 12, 2021, that “racially or ethnically motivated violent extremists” and “specifically those who advocate for the superiority of the white race” now pose the greatest threat to the domestic security of the United States.   Eileen Sullivan and Katie Brenner, “Top Law Enforcement Officials Say the Biggest Domestic Terror Threat Comes from White Supremacists,” New York Times, May 12, 2021, https://​w ww.nyti​mes.com/​2021/​05/​12/​us/​polit​ics/​domes​tic-​ter​ror-​w hite-​supre​maci​ sts.html. 5. https://​theh​ill.com/​homen​ews/​adm​inis​trat​ion/​3546​548-​88-​perc​ent-​say-​us-​is-​on-​wrong-​ track-​sur​vey/​. 6. W. P. Hanage et al., “Covid-​19: Us Federal Accountability for Entry, Spread, and Inequities,” Harvard Center for Population and Development Studies, HCPDS Working Paper 20, no. 2, October 5, 2020, https://​doi.org/​10.1007/​s10​654-​020-​00689-​2; cf. Gallup: https://​news. gal​lup.com/​poll/​1669/​gene​ral-​mood-​coun​try.aspx. 7. US district judge Kathryn Kimball Mizelle struck down the federal mask mandate for airplanes and other modes of public transportation on April 18, 2022, writing in a 59-​page ruling that the CDC had exceeded its authority and failed to follow proper rulemaking procedures. https://​s3.docume​ntcl​oud.org/​docume​nts/​21636​220/​04712​4235​804.pdf. 8. Steffie Woolhandler et al., “Public Policy and Health in the Trump Era,” The Lancet 397, no. 10275 (2021): 705–​753. 9. Clyde W. Yancy, “Covid-​19 and African Americans,” JAMA 323, no. 19 (2020): 1891–​1892, https://​doi.org/​10.1001/​jama.2020.6548; David R. Williams and Lisa A. Cooper, “Covid-​19 and Health Equity—​a New Kind of ‘Herd Immunity,’” JAMA Online, May 11, 2020, https://​ doi.org/​10.1001/​jama.2020.8051; Jonathan M. Metzl, Aletha Maybank, and Fernando De 325

 

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Maio, “Responding to the Covid-​19 Pandemic: The Need for a Structurally Competent Health Care System,” JAMA 324, no. 3 (2020): E1–​E2, https://​doi.org/​10.1001/​jama.2020.9289. 10. Howard K. Koh, Alan C. Geller, and Tyler J. VanderWeele, “Deaths from Covid-​19,” JAMA Online 325, no. 2 ( January 12, 2021): 133–​134, https://​doi.org/​10.1001/​jama.2020.25381. 11. Randall Lane, “Operation Wealth Speed,” Forbes, April 6, 2021; Ruchir Sharma, “The Billionaire Boom: How the Super-​rich Soaked Up Covid Cash,” Financial Times, May 14, 2021. 12. Lane, “Operation Wealth Speed.” 13. Sharma, “The Billionaire Boom.” 14. Sharma, “The Billionaire Boom.” 15. The International Monetary Fund estimates that the top 1% of wealth owners in Germany hold about 24% of total net national wealth. Mai Chi Dao, “Wealth Inequality and Private Savings: The Case of Germany,” IMF Working Paper WP/​20/​107, June 2020, 6, https://​doi. org/​10.5089/​978151​3546​063.001. The Credit Suisse Global Wealth report and WID World estimates for 2021 are 29.1% and 29.7%, respectively. By comparison, the US level is about 35.3% and 34.9%, respectively. Russia’s level is far higher still—​about 58.2%, according to Credit Suisse, and 47.7%, according to WID World. 16. See, for example, Thomas W. Volscho and Nathan J. Kelly, “The Rise of the Super-​rich: Power Resources, Taxes, Financial Markets, and the Dynamics of the Top 1 Percent: 1949–​2008,” American Sociological Review 77 (2012): 679–​699, https://​doi.org/​10.1177/​00031​2241​2458​ 508; Anthony Roberts Kwon, “Finance, Inequality, and the Varieties of Capitalism in Post-​ industrial Democracies,” Socio-​economic Review 15, no. 3 (2017): 511–​538, https://​doi.org/​ 10.1093/​ser/​mwx​021; Evelyne Huber, Jingling Huo, and John D. Stephens, “Power, Policy, and Top Income Shares,” Socio-​economic Review 17, no. 2 (2019): 231–​253, https://​doi.org/​ 10.1093/​ser/​mwx​027; David Hope and Angelo Martelli, “The Transition to the Knowledge Economy, Labor Market Institutions, and Income Inequality in Advanced Democracies,” World Politics 71, no. 2 (2019): 236–​288, https://​doi.org/​10.1017/​S00438​8711​8000​333. 17. A recent catalog of disappointments for the Russian case is Andrei Mel’vil’, “Piat’ nesbyvshikhsia nadezhda: Politicheskie i teoreticheskie ozhidanii ‘epokhi-​1989’ ” [Five unrealized hopes: Political and theoretical expectations of the ‘1989-​epoch’], in Demontazh kommunizma: Tridtsat’ let spustia, ed. Kirill Rogov (Moscow: Novoe literaturnoe obozrenie, 2021), 67–​93. 18. Samuel P. Huntington, The Third Wave: Democratization in the Late Twentieth Century (Norman: University of Oklahoma Press, 1991). 19. Adam Przeworski, Michael E. Alvarez, Jose Antonio Cheibub, et al., Democracy and Development: Political Institutions and Well-​ Being in the World, 1950–​ 1990 (New York: Cambridge University Press, 2000), 98. 20. Mean per capita income figures from the World Bank’s World Development Indicators Databank, for 2018, in current $US, https://​datab​ank.worldb​ank.org/​sou​rce/​world-​deve​ lopm​ent-​ind​icat​ors#; figures on the distribution of pretax income and net household wealth are from research by Emmanuel Saez and his colleagues. Detailed references will be found in Chapter 2. 21. Carles Boix, Democracy and Redistribution (New York: Cambridge University Press, 2003); Daron Acemoglu and James Robinson, Economic Origins of Dictatorship and Democracy (New York: Cambridge University Press, 2006). 22. Quoted in Thomas F. Remington, Building Socialism in Bolshevik Russia: Ideology and Industrial Organization, 1917–​1921 (Pittsburgh, PA: University of Pittsburgh Press, 1984), 17. 23. For example, Vasilii Seliunin, “Istoki,” in Istoki; Avansy i dolgi, ed. Vasilii Seliunin and Nikolai Shmelev (Moscow: Pravda, 1990), 131–​189. 24. Thomas F. Remington, The Politics of Inequality in Russia (New York: Cambridge University Press, 2011). 25. Among these are the literature associated with the “Varieties of Capitalism.” Among many other works, see Peter A. Hall and David Soskice, eds., Varieties of Capitalism (New York: Oxford University Press, 2001) and Torben Iversen and David Soskice, Democracy and Prosperity: Reinventing Capitalism through a Turbulent Century (Princeton, NJ: Princeton University Press, 2019).

 



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26. “American Democracy in an Age of Rising Inequality,” https://​www.apsa​net.org/​port​als/​ 54/​Files/​Task%20Fo​rce%20Repo​rts/​task​forc​erep​ort.pdf. This research also resulted in a special issue of a journal of the association, PS in 2006. PS: Political Science & Politics 39, no. 1 ( January 2006). 27. For example, Jacob S. Hacker, “Privatizing Risk without Privatizing the Welfare State: The Hidden Politics of Social Policy Retrenchment in the United States,” American Political Science Review 98, no. 2 (2004): 243–​260, https://​doi.org/​10.1017/​S00030​5540​4001​121; Jacob S. Hacker, Paul Pierson, and Kathleen Thelen, “Drift and Conversion: Hidden Faces of Institutional Change,” in Advances in Historical-​Comparative Analysis, ed. James Mahoney and Kathleen Thelen (New York: Cambridge University Press, 2015), 180–​208. 28. Raghuram Rajan and Luigi Zingales, Saving Capitalism from the Capitalists: How Open Financial Markets Challenge the Establishment and Spread Prosperity to Rich and Poor Alike (Princeton, NJ: Princeton University Press, 2004). 29. Luigi Zingales, “Towards a Political Theory of the Firm,” Journal of Economic Perspectives 31, no. 3 (Summer 2017): 114, https://​doi.org/​10.1257/​jep.31.3.113.

Chapter 2 1. Joseph Stiglitz, “New Theoretical Perspectives on the Distribution of Income and Wealth among Individuals: Part I. The Wealth Residual,” NBER Working Paper 21189, May 2015, https://​doi.org/​10.3386/​w21​189; Joseph E. Stiglitz, “The Origins of Inequality, and Policies to Contain It,” National Tax Journal 68, no. 2 (2015): 425–​448, https://​doi.org/​10.17310/​ ntj.2015.2.09. 2. Miles Corak, “Income Inequality, Equality of Opportunity, and Intergenerational Mobility,” Journal of Economic Perspectives 27, no. 3 (Summer 2013): 79–​102, https://​doi.org/​10.1257/​ jep.27.3.79. 3. Sean Reardon and Kendra Bischoff, “Growth in the Residential Segregation of Families by Income, 1970–​2009,” US2010 Project, November 2011, https://​doi.org/​10.1086/​657​114. 4. Robert Barro attributes this phrase to Larry Summers. See Robert J. Barro, “Convergence and Modernisation,” Economic Journal 125 (2015): 911–​942, https://​doi.org/​10.1111/​ ecoj.12247. As with a lot of “iron laws” in economics, this law works rather selectively—​it works only under certain conditions, and only “in the long run.” Of course, in a full theory of inequality, we must explain the conditions that facilitate or block convergence. 5. Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, “Distributional National Accounts: Methods and Estimates for the United States,” NBER Working Paper 22945, December 2016, https://​doi.org/​10.3386/​w22​945; Emmanuel Saez, “Striking It Richer: The Evolution of Top Incomes in the United States” (updated with 2017 final estimates), March 2, 2019, data available at http://​elsa.berke​ley.edu/​~saez/​Tab​Fig2​018p​rel.xls; Emmanuel Saez and Gabriel Zucman, “Trends in US Income and Wealth Inequality: Revising after the Revisionists,” NBER Working Paper 27921, October 2020, https://​doi.org/​10.3386/​ w27​921. 6. Carried interest refers to the share of profits received by the general partners of a private-​ equity or hedge fund, beyond whatever they invested of their own money. Ostensibly its purpose is to induce good performance on the part of the managers. It is treated favorably under the US tax code because it is taxed at the same rate as a long-​term capital gains. 7. Anders Melin, “KKR Billionaires Kravis and Roberts Get $203 Million in 2018,” Bloomberg News, February 16, 2019, https://​www.bloomb​erg.com/​news/​artic​les/​2019-​02-​16/​kkr-​billi​ onai​res-​kra​vis-​and-​robe​rts-​get-​203-​mill​ion-​in-​2018. 8. As early as 1958, Robert Solow expressed skepticism that the labor share and capital share of national income were constant. Robert M. Solow, “A Skeptical Note on the Constancy of Relative Shares,” American Economic Review 48, no. 4 (1958): 618–​631; also see Gauti B. Eggertson, Jacob A. Robbins, and Ella Getz Wold, “Kaldor and Piketty’s Facts: The Rise of Monopoly Power in the United States,” NBER Working Paper 24287, February 2018, https://​doi.org/​10.3386/​w24​287; Loukas Karabarbounis and Brent Neiman, “The Global Decline of Labor Share,” Quarterly Journal of Economics 129, no. 1 (2014): 61–​104, https://​ doi.org/​10.1093/​qje/​qjt​032.

 

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9. Loukas Karabarbounis and Brent Neiman, “Accounting for Factorless Income,” NBER Working Paper 24404, June 2018, https://​doi.org/​10.1086/​700​894. 10. I will discuss these issues in more detail below. Recent discussions include Karabarbounis and Neiman, “Global Decline”; David Autor, David Dorn, Lawrence F. Katz, Christina Patterson, and John Van Reenen, “The Fall of the Labor Share and the Rise of Superstar Firms,” NBER Working Paper 23396, May 2017, https://​doi.org/​10.3386/​w23​396; Simcha Barkai, “Declining Labor and Capital Shares,” Chicago Booth Stigler Center for the Study of the Economy and the State New Working Paper Series no. 2, November 2016, https://​doi. org/​10.1111/​jofi.12909. 11. S Corporations are a form of organization for smaller companies where an owner treats business income as personal income for tax purposes. S corporations are one form of “pass-​ through” companies, in which income from the business is taxed as personal income, thus avoiding taxes on corporate earnings. The result is generally a significant tax savings. S corporations also enjoy the other advantages of C corporations—​whose income is taxable—​ that is, limited liability, unlimited life spans, and the right to transfer ownership freely. S corporations are generally smaller in size (they can have no more than 100 shareholders) than C corporations, which tend to be in industries requiring high capital investment. They are often used by professional service firms such as medical, legal, and financial consulting firms, as well as other businesses with a large capital stock and a relatively small number of employees, such as automobile dealerships.   S Corporations are distinguished from C Corporations, which are the form that larger companies take. In a C Corporation, business income is taxed separately from the income of the shareholders. Chapter 4 discusses S Corporations and other types of pass-​through companies further. 12. Saez and Zucman, “Trends in US Income.” They are responding to Matthew Smith, Danny Yagan, Owen M. Zidar, and Eric Zwick, “Capitalists in the Twenty-​First Century,” NBER Working Paper 25442, May 2019, https://​doi.org/​10.3386/​w25​442, which treats three-​ quarters of the income of pass-​through company owners as labor income. Smith et al. treat this income as a return to “human capital,” which they interpret rather broadly to include not only skill, but also connections and political clout. 13. Alan B. Krueger, “The Rigged Labor Market,” Milken Institute Review 19, no. 2 (2017): 34; Suresh Naidu, Eric Posner, and Glen Weyl, “More and More Companies Have Monopoly Power over Workers’ Wages. That’s Killing the Economy,” Vox, April 6, 2018, https://​www. vox.com/​the-​big-​idea/​2018/​4/​6/​17204​808/​wages-​employ​ers-​work​ers-​monops​ony-​gro​ wth-​sta​gnat​ion-​ine​qual​ity; Suresh Naidu, Eric Posner, and Glen Weyl, “Antitrust Remedies for Labor Market Power,” Harvard Law Review 132, no. 2 (2018): 549–​601. 14. Cf. Christa Conry, “Forbidden Fruit: Sexual Victimization of Migrant Workers in America’s Farmlands,” Hastings Women’s Law Journal 1, no. 1 (2015): 121–​146. 15. To cite a very few studies of these phenomena: Annette Bernhardt et al., “Broken Laws, Unprotected Workers: Violations of Employment and Labor Laws in America’s Cities,” National Employment Law Project, 2009, https://​www.nelp.org/​publ​icat​ion/​bro​ken-​laws-​ unpr​otec​ted-​work​ers-​vio​lati​ons-​of-​emp​loym​ent-​and-​labor-​laws-​in-​ameri​cas-​cit​ies; Josh Bivens, Lawrence Mishel, and John Schmitt, “It’s Not Just Monopoly and Monopsony: How Market Power Has Affected American Wages,” Economic Policy Institute, April 25, 2018; Josh Bivens and Heidi Shierholz, “What Labor Market Changes Have Generated Inequality and Wage Suppression?,” Economic Policy Institute, December 12, 2018, https://​www.epi. org/​publ​icat​ion/​what-​labor-​mar​ket-​chan​ges-​have-​genera​ted-​ine​qual​ity-​and-​wage-​supp​ress​ ion-​emplo​yer-​power-​is-​sign​ific​ant-​but-​larg​ely-​const​ant-​wher​eas-​work​ers-​power-​has-​been-​ ero​ded-​by-​pol​icy-​acti​ons/​; Kate Bronfenbrenner, “No Holds Barred: The Intensification of Employer Opposition to Organizing,” Economic Policy Institute and American Rights at Work Education Fund, EPI Briefing Paper no. 235, May 20, 2009; Jane Flanagan, “It’s Not Just Noncompetes—​Increased Use of Anti-​competitive Contracts Has Limited Workers’ Bargaining Power and Employers’ Hiring Power,” EPI Blog, August 28, 2019, https://​www. epi.org/​blog/​its-​not-​just-​nonc​ompe​tes-​increa​sed-​use-​of-​anti-​comp​etit​ive-​contra​cts-​has-​ limi​ted-​work​ers-​bar​gain​ing-​power-​and-​employ​ers-​hir​ing-​power/​.

 



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16. On this point, see Kim M. Bloomquist, “The Tax Gap: Holding Steady or Missing in Action?,” Tax Notes Federal 165, no. 4 (2019): 593–​600. 17. Cf. Jack Knight, Institutions and Social Conflict (New York: Cambridge University Press, 1992). 18. Major recent examples include Jacob S. Hacker and Paul Pierson, Off Center: The Republican Revolution and the Erosion of American Democracy (New Haven, CT: Yale University Press, 2005); Jacob S. Hacker and Paul Pierson, Winner-​Take-​All Politics (New York: Simon & Schuster, 2010); Nolan McCarty, Keith T. Poole, and Howard Rosenthal, Polarized America: The Dance of Ideology and Unequal Riches, 2nd ed. (Cambridge, MA: MIT Press, 2016); Christopher H. Achen and Larry M. Bartels, Democracy for Realists: Why Elections Do Not Produce Responsive Government (Princeton, NJ: Princeton University Press, 2016); Larry M. Bartels, Unequal Democracy: The Political Economy of the New Gilded Age (Princeton, NJ: Princeton University Press, 2008); Benjamin I. Page and Martin Gilens, Democracy in America? What Has Gone Wrong and What We Can Do about It (Chicago: University of Chicago Press, 2018). 19. Xavier Gabaix and Augustin Landier, “Why Has CEO Pay Increased So Much?,” Quarterly Journal of Economics 123, no. 1 (2008): 49–​99, https://​doi.org/​10.1162/​qjec.2008.123.1.49; Chris Edmond, Virgiliu Midrigan, and Daniel Yi Xu, “How Costly Are Markups?,” NBER Working Paper 24800, July 2018, https://​doi.org/​10.3386/​w24​800; N. Gregory Mankiw, “Defending the One Percent,” Journal of Economic Perspectives 27, no. 3 (2013): 21–​22, https://​doi.org/​10.1257/​jep.27.3.21. 20. Carter Price and Kathryn A. Edwards, “Trends in Income from 1975 to 2018,” RAND Education and Labor WR-​A516-​1, September 2020, https://​doi.org/​10.2139/​ssrn.3693​432. 21. Carlotta Balestra and Richard Tonkin, “Inequalities in Household Wealth across OECD Countries: Evidence from the OECD Wealth Distribution Database,” OECD SDD/​ DOC(2018)1, June 20, 2018, https://​doi.org/​10.1787/​7e1bf​673-​en. 22. Balestra and Tonkin, “Inequalities in Household Wealth,” 36. 23. Below I discuss Pareto’s law in greater detail. These figures are calculated from data compiled from the Federal Reserve’s Survey of Consumer Finances. This is a comprehensive survey of households’ incomes and finances. Although it is based on surveys rather than administrative (tax) data, so it cannot tell us much about the very top end (i.e., the top 1% or 5%), it has a number of advantages as a source of data on inequality. It includes many different kinds of income and assets; the samples are large; and they are matched to national accounts data to ensure consistency with macroeconomic figures. This data is from a replication data set linked to Moritz Kuhn, Moritz Schularick, and Ulrike I. Steins, “Income and Wealth Inequality in America, 1949–​2016,” Journal of Political Economy 128, no. 9 (2020): 3469–​3519, https://​ doi.org/​10.1086/​708​815. 24. Ganesh Sitaraman, The Crisis of the Middle-​Class Constitution: Why Economic Inequality Threatens Our Republic (New York: Knopf, 2017); William Easterly, “The Middle Class Consensus and Economic Development,” Journal of Economic Growth 6, no. 4 (2001): 317–​335, https://​doi.org/​10.1023/​A :101278​6330​095; John B. Londregan and Keith T. Poole, “Does High Income Promote Democracy?,” World Politics 49 (1996): 1–​30, https://​doi.org/​10.1353/​wp.1996.0024; Daron Acemoglu and James Robinson, Economic Origins of Dictatorship and Democracy (New York: Cambridge University Press, 2006). 25. Robert E. Lucas, “The Industrial Revolution: Past and Future,” Annual Report, Federal Reserve Bank of Minneapolis 18 (May 2004): 5–​20; Steven Pinker, Enlightenment Now: The Case for Reason, Science, and Humanism (New York: Viking, 2018). 26. Martin Feldstein, “Income Inequality and Poverty,” NBER Working Paper 6670, October 1998; Mankiw, “Defending the One Percent”; Finis Welch, “In Defense of Inequality,” American Economic Review 89, no. 2 (1999): 1–​17, https://​doi.org/​10.1257/​aer.89.2.1. 27. K. M. Shaw, K. A. Theis, S. Self-​Brown, et al., “Chronic Disease Disparities by County Economic Status and Metropolitan Classification, Behavioral Risk Factor Surveillance System,” Preventing Chronic Disease Public Health Research, Practice, and Policy 13 (E119), 2016, https://​doi.org/​10.5888/​pcd13.160​088. 28. Paula A. Braveman, Catherine Cubbin, Susan Egerter, et al., “Socioeconomic Disparities in Health in the United States: What the Patterns Tell Us,” American Journal of Public Health 100 (Supplement) (April 2010): S186–​S196, https://​doi.org/​10.2105/​A JPH.2009.166​

 

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082; Laura Dwyer-​Lindgren, Amelia Bertozzi-​Villa, Rebecca W. Stubbs, et al., “Inequalities in Life Expectancies among US Counties, 1980 to 2014: Temporal Trends and Key Drivers,” JAMA Internal Medicine 177, no. 7 (2017): 1003–​1011, https://​doi.org/​10.1001/​jamain​tern​ med.2017.0918; Frederick J. Zimmerman and Nathaniel W. Anderson, “Trends in Health Equity in the United States by Race/​Ethnicity, Sex, and Income, 1993–​2017,” JAMA Network Open 2, no. 6 (2019): 1–​10, https://​doi.org/​10.1001/​jama​netw​orko​pen.2019.6386. 29. Anne Case and Angus Deaton, Deaths of Despair and the Future of Capitalism (Princeton, NJ: Princeton University Press, 2020); Carol Graham and Sergio Pinto, “The Geography of Desperation in America: Labor Force Participation, Mobility, Place, and Well-​Being,” Social Science & Medicine 270 (February 2021): 113612–​113612, https://​doi.org/​10.1016/​ j.socsci​med.2020.113​612; Carol Graham and Sergio Pinto, “Unequal Hopes and Lives in the USA: Optimism, Race, Place, and Premature Mortality,” Journal of Population Economics 32 (2019): 665–​733, https://​doi-​org.ezp-​prod1.hul.harv​ard.edu/​10.1007/​s00​148-​018-​0687-​y. 30. Emily A. Knapp et al., “Economic Insecurity and Deaths of Despair in US Counties,” American Journal of Epidemiology 188, no. 12 (2019): 2131–​2139, https://​doi.org/​10.1093/​aje/​kwz​ 103. The authors calculate an index of overall insecurity based on labor force participation rates, unemployment, share of income spent on rent payments, employment in service jobs, and percentage of adults with a subprime credit rating. They divide counties into three tertiles of insecurity levels. 31. Eric D. Finegood, Daniel A. Briley, Nicholas A. Turiano, Alexa Freedman, Susan C. South, Robert F. Krueger, Edith Chen, Daniel K. Mroczek, and Gregory E. Miller, “Association of Wealth with Longevity in US Adults at Midlife,” JAMA Health Forum 2, no. 7 (2021): 1–​12, https://​doi.org/​10.1001/​jama​heal​thfo​rum.2021.1652. 32. Kai Ruggeri et al., “The Globalizability of Temporal Discounting,” Nature: Human Behaviour 6 (2022): 1–​15; Sendhil Mullainathan and Eldar Shafir, Scarcity: The New Science of Having Less and How It Defines Our Lives (New York: Picador, 2013). 33. Graham and Pinto, “Geography of Desperation.” 34. Organisation for Economic Co-​operation and Development, Under Pressure: The Squeezed Middle Class (Paris: OECD Publishing, 2019), https://​doi.org/​10.1787/​689af​ed1-​en; Rakesh Kochhar, “Middle Class Fortunes in Western Europe,” Pew Research Center, May 25, 2017. 35. Sendhil Mullainathan and Eldar Shafir miss this point in their book Scarcity. They offer a general theory of the psychological effect of scarcity in shortening time horizons; for them, poverty is simply “the most widespread and important example of scarcity” (147). Although they recognize that for many people, scarcity is a felt condition induced by comparing oneself to others, they focus only on its psychological consequences for the self, whether an overtaxed executive or an impoverished farmer.See also Ruggeri et al., “Globalizability of Temporal Discounting.” These researchers find that in countries with high inflation and financial uncertainty, people tended to discount the future more heavily, tending to prefer immediate gains over longer-​term gains. This was true both among high-​and low-​income people in high-​ uncertainty societies. 36. Keith Payne, The Broken Ladder: How Inequality Affects the Way We Think, Live, and Die (New York: Penguin, 2018); Michael Marmot, The Status Syndrome: How Social Standing Affects Our Health and Longevity (New York: Henry Holt, 2014). 37. Adam Smith observed that we tend to identify ourselves more readily with the rich than with the poor. “The rich man glories in his riches, because . . . they naturally draw upon him the attention of the world.” On the other hand, the poor man goes out and comes in unheeded.” Extreme inequality, therefore, saps both our morality and our happiness. Dennis C. Rasmussen, “Adam Smith on What Is Wrong with Economic Inequality,” American Political Science Review 110, no. 2 (2016): 351–​352. 38. Case and Deaton, Deaths of Despair; Graham and Pinto, “Geography of Desperation”; Richard Wilkinson and Kate Pickett, The Spirit Level: Why Greater Equality Makes Societies Stronger (London: Bloomsbury Press, 2011). 39. Shiwani Mahajan et al., “Trends in Differences in Health Status and Health Care Access and Affordability by Race and Ethnicity in the United States, 1999–​2018,” JAMA 326, no. 7 (2021): 637–​648. The study treats self-​reported health dichotomously as either “fair or poor”

 



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or “good, very good, or excellent.” Income level is also treated dichotomously, as either above or below twice the national family poverty line for the given year. 40. Payne, The Broken Ladder; Marmot, The Status Syndrome. 41. W. G. Runciman, Relative Deprivation and Social Justice: A Study of Attitudes to Social Inequality in Twentieth Century England (London: Routledge & Kegan Paul, 1966). 42. A famous study of the idea (noted by Tocqueville in Democracy in America) that people’s dissatisfaction rises more when their circumstances begin to improve, and they come to expect more, than when they are declining, was Ted Robert Gurr, Why Men Rebel (Princeton, NJ: Princeton University Press, 1970). 43. This debate is reflected in the history of the term “dignity.” One conception is that dignity is a matter of knowing and accepting one’s own proper station in life. Another is one’s sense of whether others accord us our due. Cf. Michael Rosen, Dignity: Its History and Meaning (Cambridge, MA: Harvard University Press, 2012). 44. Moving illustrations of this point are expressed in texts and pictures in the book by Chris Arnade, Dignity: Seeking Respect in Back Row America (New York: Sentinel, 2019). 45. Abhijit V. Banerjee and Esther Duflo, Good Economics for Hard Times (New York: Public Affairs, 2019), 317. 46. Arlie Hochchild, Strangers in Their Own Land: Anger and Mourning on the American Right (New York: New Press, 2016); Jacob S. Hacker and Paul Pierson, Let Them Eat Tweets: How the Right Rules in an Age of Extreme Inequality (New York: Liveright, 2020). 47. David Autor, David Dorn, Gordon Hanson, et al., “Importing Political Polarization? The Electoral Consequences of Rising Trade Exposure,” American Economic Review 110, no. 10 (2020): 3139–​3183, https://​doi.org/​10.1257/​aer.20170​011. 48. Hacker and Pierson, Let Them Eat Tweets. 49. Barack Obama, A Promised Land (New York: Crown, 2020). 50. Hacker and Pierson, Let Them Eat Tweets. Thomas Edsall recognized this phenomenon as crucial in driving support for Ronald Reagan in the 1980 election: Thomas Byrne Edsall, The New Politics of Inequality (New York: Norton, 1984). 51. Jessica Trounstine, Segregation by Design: Local Politics and Inequality in American Cities (New York: Cambridge University Press, 2018); Easterly, “Middle Class Consensus”; Alberto Alesina, Edward Glaeser, and B. S. Sacerdote, “Why Doesn’t the US Have a European-​Style Welfare State?,” Brookings Papers on Economic Activity 2 (2001): 187–​277, https://​doi.org/​ 10.1353/​eca.2001.0014; Alberto Alesina and Edward L. Glaeser, Fighting Poverty in the US and Europe: A World of Difference (New York: Oxford University Press, 2004). 52. Michael J. Sandel, What Money Can’t Buy: The Moral Limits of Markets (New York: Farrar, Straus and Giroux, 2012). 53. Katherine J. Cramer, The Politics of Resentment: Rural Consciousness in Wisconsin and the Rise of Scott Walker (Chicago: University of Chicago Press, 2016). 54. Reardon and Bischoff, “Growth in Residential Segregation”; Raj Chetty et al., “Where Is the Land of Opportunity? The Geography of Intergenerational Mobility in the United States,” Quarterly Journal of Economics 129, no. 4 (2014): 1553–​1623. 55. Sean Reardon, “The Widening Academic Achievement Gap between the Rich and the Poor,” in Whither Opportunity: Rising Inequality, Schools, and Children’s Life Chances, ed. Greg J. Duncan and Richard J. Murnane (New York: Russell Sage Foundation, 2011), 91–​116. 56. Heather Boushey, Unbound: How Inequality Constricts Our Economy and What We Can Do about It (Cambridge, MA: Harvard University Press, 2019); Benjamin Austin, Edward Glaeser, and Lawrence H. Summers, “Saving the Heartland: Place-​Based policies in 21st Century America,” Brookings Papers on Economic Activity, BPEA Conference Drafts, March 8–​9, 2018. 57. Raj Chetty et al., “The Fading American Dream: Trends in Absolute Income Mobility, since 1940,” Science 35, no. 6 (April 28, 2017): 398–​406, https://​doi.org/​10.1126/​scie​nce.aal4​ 617; Chetty et al., “Land of Opportunity”; Reardon, “Widening Academic Achievement Gap.” 58. Fatih Guvenen, Greg Kaplan, Jae Song, and Justin Weidner, “Lifetime Incomes in the United States over Six Decades,” NBER Working Paper 23371 April 2017, https://​doi.org/​10.3386/​ w23​371.

 

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59. Women’s lifetime incomes have grown relative to men’s both because of the greater number of women in the labor force—​itself partly a response to stagnating men’s wages and partly as a result of a larger share of households headed by single women—​and because women are receiving higher wages as more women enter higher-​wage occupations. Change is therefore both on the “extensive” and “intensive” margin. 60. Yi Fan, Junjian Yi, and Junsen Zhang, “Rising Intergenerational Income Persistence in China,” American Economic Journal: Economic Policy 13, no. 1 (2021): 202–​230, https://​doi.org/​ 10.1257/​pol.20170​097; Yi Fan, Junjian Yi, and Junsen Zhang, “Rising Intergenerational Income Persistence in China,” IZA Institute of Labor Economics IZA DP no. 12804, November 2019. 61. Jane Golley and Sherry Tao Kong, “Inequality of Opportunity in China’s Educational Outcomes,” China Economic Review 51 (2016): 116–​128, https://​doi.org/​10.1016/​j.chi​ eco.2016.07.002; Jane Golley and Sherry Tao Kong, “Inequality in Intergenerational Mobility of Education in China,” China & World Economy 21, no. 2 (2013): 15–​37, https://​doi.org/​ 10.1111/​j.1749-​124X.2013.12013.x. 62. Raghuram Rajan, Fault Lines: How Hidden Fractures Still Threaten the World Economy (Princeton, NJ: Princeton University Press, 2010); Michael Kumhof and Romain Ranciere, “Inequality, Leverage and Crises,” IMF Working Paper WP/​10/​268, November 2010. 63. Rajan; Fault Lines; Jonathan D. Ostry, Prakash Loungani, and Andrew Berg, Confronting Inequality: How Societies Can Choose Inclusive Growth (New York: Columbia University Press, 2019). 64. Andrew G. Berg and Jonathan D. Ostry, “Inequality and Unsustainable Growth: Two Sides of the Same Coin?,” IMF Economic Review 65 (2017): 792–​815, https://​doi.org/​10.1057/​s41​ 308-​017-​0030-​8. 65. Banerjee and Duflo, Good Economics; Organisation for Economic Co-​ operation and Development, In It Together: Why Less Inequality Benefits All (Paris: OECD, 2015). 66. https://​ilsr.org/​dol​lar-​sto​res/​. 67. William F. Owen, Richard Carmona, and Claire Pomeroy, “Failing Another National Stress Test on Health Disparities,” JAMA 323, no. 19 (2020): 1905–​1906, https://​doi.org/​10.1001/​ jama.2020.6547; Clyde W. Yancy, “COVID-​19 and African Americans,” JAMA 323, no. 19 (2020): 1891–​1892, https://​doi.org/​10.1001/​jama.2020.6548; Tori L. Cowger, Brigette A. Davis, Onisha S. Etkins, et al., “Comparison of Weighted and Unweighted Population Data to Assess Inequities in Coronovirus Disease 2019 Deaths by Race/​Ethnicity Reported by the US Centers for Disease Control and Prevention,” JAMA Network Open, July 28, 2020, 1–​4, https://​doi.org/​10.1001/​jama​netw​orko​pen.2020.16933. 68. Phil Gramm and John F. Early, “The Myth of American Inequality,” Wall Street Journal, August 9, 2018; Gerald Auten and David Splinter, “Income Inequality in the United States: Using Tax Data to Measure Long-​Term Trends,” August 23, 2018; John F. Early, “Reassessing Inequality Redistribution,” Cato Institute, August 24, 2018, https://​www.cato.org/​publi​cati​ons/​pol​ icy-​analy​sis/​reas​sess​ing-​facts-​about-​ine​qual​ity-​pove​rty-​red​istr​ibut​ion; Feldstein, “Income Inequality and Poverty”; James Freeman, “Income Inequality Is Often by Choice,” Wall Street Journal, September 20, 2021. 69. For example, Bruce D. Meyer and James Sullivan, “Consumption and Income Inequality in the US since the 1960s,” VOXEU CEPR, January 15, 2018, https://​voxeu.org/​arti​cle/​cons​ umpt​ion-​and-​inc​ome-​ine​qual​ity-​us-​1960s); Bruce D. Meyer and James X. Sullivan, “Further Results on Measuring the Well-​Being of the Poor Using Income and Consumption,” NBER Working Paper 13413, September 2007; Bruce D. Meyer, “Measuring the Well-​Being of the Poor Using Income and Consumption,” Journal of Human Resources 38(S) (2003): 1180–​ 1220, https://​doi.org/​10.2307/​3558​985. 70. Welch, “In Defense of Inequality,” 13; Daniel Treisman, “Inequality: The Russian Experience,” Current History 111, no. 747 (2012): 264–​269, https://​doi.org/​10.1525/​ curh.2012.111.747.264. 71. Jonathan Morduch, “Income Smoothing and Consumption Smoothing,” Journal of Economic Perspectives 9, no. 3 (1995): 103–​114, https://​doi.org/​10.1257/​jep.9.3.103. 72. Andrew Biggs, “The Phony Retirement Crisis,” Wall Street Journal, February 28, 2019. 73. Welch, “In Defense of Inequality,” 2.

 



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74. Welch, “In Defense of Inequality,” 26. 75. Emmanuel Saez and Gabriel Zucman, The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay (New York: Norton, 2019). 76. Gramm and Early, “Myth of American Inequality.” 77. Hilary W. Hoynes and Ankur J. Patel, “Effective Policy for Reducing Poverty and Inequality? Earned Income Tax Credit and the Distribution of Income,” Journal of Human Resources 53, no. 4 (2018): 859–​890, https://​doi.org/​10.3368/​jhr.53.4.1115.749​4R1. 78. William H. Dow, Anna Godøy, Christopher A. Lowenstein, and Michael Reich, “Can Economic Policies Reduce Deaths of Despair?,” NBER Working Paper 25787, April 2019, https://​doi.org/​10.1016/​j.jheal​eco.2020.102​372. 79. Banerjee and Duflo, Good Economics. 80. For example, see David J. Price and Jae Song, “The Long-​Term Effects of Cash Assistance,” Princeton University, Industrial Relations Section, Working Paper no. 621, June 2018 http://​ arks.prince​ton.edu/​ark:/​88435/​dsp​01ng​451m​210. 81. Lisa M. Powell, “Fast Food Costs and Adolescent Body Mass Index: Evidence from Panel Data,” Journal of Health Economics 28, no. 5 (2009): 963–​970, https://​doi.org/​10.1016/​j.jheal​ eco.2009.06.009; Katie A. Meyer, David Guilkey, Shu Wen Ng, et al., “Sociodemographic Differences in Fast Food Price Sensitivity,” JAMA Internal Medicine 174, no. 3 (2014): 434–​ 442, https://​doi.org/​10.1001/​jamain​tern​med.2013.13922; Kiyah J. Duffey, Penny Gordon-​ Larsen, James M. Shikany, et al., “Food Price and Diet and Health Outcomes: 20 Years of the CARDIA Study,” JAMA Internal Medicine 170, no. 5 (2010): 420–​426, https://​doi.org/​ 10.1001/​archin​tern​med.2009.545. 82. Dwyer-​Lindgren et al., “Inequalities in Life Expectancies.” 83. Alisha Coleman-​ Jensen, Matthew P. Rabbitt, Christian A. Gregory, and Anita Singh, “Household Food Security in the United States in 2018,” Economic Research Service, United States Department of Agriculture, Economic Research Report no. 270, September 2019. The government defines food insecurity as difficulty at some point during the past year in providing enough food for family members. 84. US Department of Agriculture figures, https://​www.ers.usda.gov/​data-​produ​cts/​ag-​ and-​food-​sta​tist​ics-​chart​ing-​the-​ess​enti​als/​food-​pri​ces-​and-​spend​ing/​#:~:text=​In%202​ 019%2C%20hou​seho​lds%20in%20the,repre​sent​ing%208.0%20perc​ent%20of%20inc​ome. 85. Bradley Hardy and James P. Ziliak, “Decomposing Trends in Income Volatility: The ‘Wild Ride’ at the Top and Bottom,” Economic Inquiry 52, no. 1 (2014): 459–​476, https://​doi.org/​ 10.1111/​ecin.12044. 86. Hardy and Ziliak, “Decomposing Trends.” 87. Jacob S. Hacker, “Privatizing Risk without Privatizing the Welfare State: The Hidden Politics of Social Policy Retrenchment in the United States,” American Political Science Review 98, no. 2 (2004): 243–​260, https://​doi.org/​10.1017/​S00030​5540​4001​121; Jacob S. Hacker, The Great Risk Shift: The New Economic Security and the Decline of the American Dream, 2nd ed. (New Haven, CT: Yale University Press, 2019). 88. Edward N. Wolff, “Who Owns Stock in American Corporations,” Proceedings of the American Philosophical Society 158, no. 4 (2014): 372–​391; Edward N. Wolff, “Household Wealth Trends in the United States, 1962–​2016: Has Middle Class Wealth Recovered?,” NBER Working Paper 24085, November 2017, 74, https://​doi.org/​10.1111/​j.1475-​4991.1994. tb00​056.x. 89. Wolff, “Household Wealth Trends,” 9. 90. Peter Kuhn and Fernando Lozano, “The Expanding Workweek? Understanding Trends in Long Work Hours among U.S. Men, 1979–​2004,” Journal of Labor Economics 26, no. 2 (2008): 311–​343, https://​doi.org/​10.1086/​533​618. 91. Bureau of Labor Statistics, “A Profile of the Working Poor,” Report 1087, July 2020, https://​ www.bls.gov/​opub/​repo​rts/​work​ing-​poor/​2018/​home.htm. 92. Kristin F. Butcher and Diane Whitmore Schanzenbach, “Most Workers in Low-​Wage Labor Market Work Substantial Hours, in Volatile Jobs,” Center on Budget and Policy Priorities, July 24, 2018; Kathleen Thelen, “The American Precariat: U.S. Capitalism in Comparative Perspective,” Perspectives on Politics 17, no. 1 (2019): 5–​27, https://​doi.org/​10.1017/​S15375​ 9271​8003​419.

 

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93. Many factors account for the declining rates of labor force participation. Probably the biggest is the aging of the workforce. A major factor is the loss of jobs requiring lower levels of education and certainly the decline in manufacturing employment. The availability of cheap, potent synthetic opioids is a major factor as well. The fact that the decline in labor force participation among younger workers is considerably higher among men than women also suggests that psychosocial factors, such as those outlined above, are involved. Cf. Alan B. Krueger, “Where Have All the Workers Gone? An Inquiry into the Decline of the U.S. Labor Force Participation Rate,” Brookings Papers on Economic Activity, Fall 2017, 1–​87, https://​doi.org/​ 10.1353/​eca.2017.0012; Katherine G. Abraham and Melissa S. Kearney, “Explaining the Decline in the U.S. Employment-​to-​Population Ratio: A Review of the Evidence,” NBER Working Paper 24333, February 2018, https://​doi.org/​10.3386/​w24​333; Ryan Nunn, Jana Parsons, and Jay Shambaugh, “Labor Force Nonparticipation: Trends, Causes, and Policy Solutions,” Strategy Paper, Hamilton Project, Brookings Institution, October 2019. 94. Payne, The Broken Ladder; Case and Deaton, Deaths of Despair. 95. Graham and Pinto, “Geography of Desperation.” 96. I use men’s earnings to illustrate the trend, because men’s and women’s earnings have diverged over time as women have entered the labor force in greater numbers; women’s earnings have come closer to men’s but still have not caught up. 97. Abraham and Kearney, “Explaining the Decline”; Krueger, “Where Have All the Workers Gone?” 98. Michael Brei, Giovanni Ferri, and Leonardo Gambacort, “Financial Structure and Income Inequality,” Bank for International Settlements, BIS Working Papers no. 756, November 2018; Martin Cihák and Ratna Sahay, “Finance and Inequality,” IMF Staff Discussion SDN/​ 20/​01, January 2020, https://​doi.org/​10.5089/​978151​3526​546.006; Ratna Sahay, Martin Cihák, Papa N’Diaye, et al., “Rethinking Financial Deepening Stability and Growth in Emerging Markets,” IMF Staff Discussion Note SDN/​15/​08, May 2015. 99. Anthony B. Atkinson, Thomas Piketty and Emmanuel Saez, “Top Incomes in the Long Run of History,” Journal of Economic Literature 49, no. 1 (2011): 10, https://​doi.org/​10.1257/​ jel.49.1.3; Lars Osberg, The Age of Increasing Inequality: The Astonishing Rise of Canada’s 1% (Toronto: James Lorimer, 2018), 66. 100. https://​www.cen​sus.gov/​progr​ams-​surv​eys/​acs/​microd​ata.html. 101. Saez, “Striking It Richer.” 102. John Guyton, Patrick Langetieg, Max Risch, Daniel Reck, and Gabriel Zucman, “Tax Evasion at the Top of the Income Distribution: Theory and Evidence,” NBER Working Paper 28542, March 2021, https://​doi.org/​10.3386/​w28​542; Andrew Johns and Joel Slemrod, “The Distribution of Income Tax Noncompliance,” National Tax Journal 63, no. 3 (September 2010): 405–​406. 103. Xiaolu Wang, “Grey Income and Income Inequality,” Credit Suisse, Analysing Chinese Grey Income, August 6, 2010. 104. Thomas Piketty, Li Yang, and Gabriel Zucman, “Capital Accumulation, Private Property and Rising Inequality in China, 1978–​2015,” American Economic Review 109, no. 7 ( July 2019): 2469–​2496. 105. For example, Serguey Braguinsky, Sergey Mityakov, and Andrey Liscovich, “Direct Estimation of Hidden Earnings: Evidence from Russian Administrative Data,” Journal of Law and Economics 57 (May 2014): 281–​319, https://​doi.org/​10.1086/​675​943. 106. An ambitious effort by the Chinese scholar Tian Weimin to reconstruct province-​level Gini index figures for China for the period between 1995 and 2010 illustrates this difficulty. He takes income averages for broad income groups from the province yearbooks, which report household survey data. This produces biased results due to aggregating around the means rather than the median. He does this for the urban and rural household sectors separately. These income groups therefore overlap. The province Gini is then calculated as the contribution of each income group, weighted by population share, to overall inequality for urban and rural residents. Then he calculates an overall province Gini by adding the shares of each sector in the province’s population. Tian acknowledges the problem of using overlapping groups but finds no usable alternative to this procedure.

 



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  The results yield implausibly low estimates of inequality. He estimates the urban Gini index for Beijing, for example, as 0.25, the rural as 0.2856, the combined as 0.2739 (because the urban population share is around 85%). Moreover, inequality in his estimates tends to be higher for provinces farther west than along the coast. Such dubious results can only be achieved by the combination of severe undersampling of the highest and lowest income strata and aggregating by averages for each broad income group. These figures run counter to a substantial body of literature from China and around the world indicating that higher-​income regions almost invariably have higher income inequality—​above all because of the effects of income growth on income gains at the top of the distribution. These are the income groups least likely to be sampled and reported adequately in official household surveys.   See Weimin Tian, “Shengyu jumin shouru jini xishu cesuan jiqi biandong qushi fenxi” [Provincial income Gini coefficient: Levels and changes], Jingji kexue (Economic Science) 2 (2012): 48–​59.   Relying on such flawed methods for analysis yields equally flawed results. For example, Yingnan Joseph Zhou and Shuai Jin estimate a multilevel model of the determinants of individual-​level mistrust of the central and local governments, by province. They interact the figures on province-​level inequality from Tian with individual-​level social status to explain variation in levels of trust in government. Since the Tian figures are suspect, one cannot place much credence in the Zhou-​Jin results. Yingnan Joseph Zhou and Shuai Jin, “Inequality and Political Trust in China: The Social Volcano Thesis Re-​examined,” China Quarterly 236 (2018): 1033–​1062, https://​doi.org/​10.1017/​S03057​4101​8001​297. 107. A considerable literature in political science has documented the outsize influence of the highest-​income strata in American politics. See, inter alia, Achen and Bartels, Democracy for Realists; Bartels, Unequal Democracy; Hacker and Pierson, Winner-​Take-​All Politics; K. L. Schlozman et al. Unequal and Unrepresented: Political Inequality and the People’s Voice in the New Gilded Age (Princeton, NJ: Princeton University Press, 2018); Page and Gilens, Democracy in America; McCarty, Poole, and Rosenthal, Polarized America. 108. Atkinson, Piketty, and Saez, “Top Incomes.” 109. US Census Bureau, Current Population Survey, 1968 to 2020 Annual Social and Economic Supplements (CPS ASEC), https://​www.cen​sus.gov/​data/​datas​ets/​time-​ser​ies/​demo/​ cps/​cps-​asec.html. 110. Congressional Budget Office, estimates for 2015, www.cbo.gov/​publ​icat​ion/​54646. 111. Philip Armour, Richard V. Burkhauser, and Jeff Larrimore, “Using the Pareto Distribution to Improve Estimates of Topcoded Earnings,” Economic Inquiry 54, no. 2 (2016): 1263–​1273, https://​doi.org/​10.1111/​ecin.12299. 112. For these reasons, the estimates of inequality using the Gini index reported by the World Bank significantly understate actual inequality. We can use interpolations to derive somewhat more accurate estimates. The state Russian statistics agency reports that the Gini index for income in Russia in 2019 was 0.413. The WID World data estimate that the top 1% in Russia receives 21.28% of the income. If none of that income is reported, then the actual Gini index would be higher than the reported figure by 12.5 percentage points: true Gini =​0.2128 +​(1 − 0.2128) * 0.413 =​0.538. For China, if the top income group receives about 30% of income (this is based on estimates by Sicular, Li, Yue, and Sato), that would raise the Gini from the official figure by 17 percentage points: True Gini =​0.29 +​(1 − 0.29) * 0.414 =​0.584. See Chuliang Luo, Terry Sicular, and Shi Li, “Overview,” in Changing Trends in China’s Inequality, ed. Terry Sicular, Shi Li, Ximing Yue, and Hiroshi Sato (New York: Oxford University Press, 2020), 67–​69. 113. https://​equi​tabl​egro​wth.org/​the-​distr​ibut​ion-​of-​wea​lth-​in-​the-​uni​ted-​sta​tes-​and-​impli​cati​ ons-​for-​a-​net-​worth-​tax/​. 114. A sampling of the literature in economics discussing the application of Pareto distributions to income and wealth includes Atkinson, Piketty, and Saez, “Top Incomes”; Anthony B. Atkinson, “Pareto and the Upper Tail of the Income Distribution in the UK: 1799 to the Present,” Economica 84 (2017): 129–​ 156, https://​doi.org/​10.1111/​ecca.12214; Michal Brzezinski, “Do Wealth Distributions Follow Power Laws? Evidence from ‘Rich Lists,’” Physica A 406 (2014): 155–​162, https://​doi.org/​10.1016/​j.physa.2014.03.052;

 

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Price and Edwards, “Trends in Income”; Armour, Burkhauser, and Larrimore, “Using the Pareto Distribution”; Xavier Gabaix, “Power Laws in Economics and Finance,” Annual Review of Economics 1, no. 1 (2009): 255–​293, https://​doi.org/​10.1146/​annu​rev.econom​ ics.050​708.142​940; Gabaix and Landier, “Why Has CEO Pay Increased”; Charles I. Jones, “Pareto and Piketty: The Macroeconomics of Top Income and Wealth Inequality,” Journal of Economic Perspectives 29, no. 1 (2015): 29–​46, https://​doi.org/​10.1257/​jep.29.1.29; Charles I. Jones and Jihee Kim, “A Schumpeterian Model of Top Income Inequality,” Journal of Political Economy 126, no. 5 (2018): 1785–​1826, https://​doi.org/​10.1086/​699​190.   Similar distributions have been found to apply very widely in nature and society, again for reasons that are poorly understood. For example, for discussions of Zipf ’s law on the distribution of the size of cities, see Steven Strogatz, “Guest Column: Math and the City,” New York Times, May 19, 2009; Paul Krugman, “Confronting the Mystery of Urban Hierarchy,” Journal of the Japanese and International Economies 10 (1996): 399–​418, https://​doi.org/​10.1006/​ jjie.1996.0023; Xavier Gabaix, “Zipf ’s Law for Cities: An Explanation,” Quarterly Journal of Economics 114, no. 3 (1999): 739–​767, https://​doi.org/​10.1162/​0033​5539​9556​133. 115. Cf. Matthew Hindman, The Internet Trap: How the Digital Economy Builds Monopolies and Undermines Democracy (Princeton, NJ: Princeton University Press, 2018); Robert L. Axtell, “Zipf Distribution of U.S. Firm Sizes,” Science 293 (September 7, 2001): 1818–​1820, https://​ doi.org/​10.1126/​scie​nce.1062​081; Sebastian Meyer and Leonhard Held, “Power-​ Law Models for Infectious Disease Spread,” Annals of Applied Statistics 8, no. 3 (2014): 1612–​ 1639, https://​doi.org/​10.1214/​14-​AOAS​743; Carla M. A. Pinto, A. Mendes Lopes, and J. A. Tenreido Machado, “A Review of Power Laws in Real Life Phenomena,” Communications in Nonlinear Science & Numerical Simulation 17, no. 9 (2012): 3558–​3578, https://​doi. org/​10.1016/​j.cnsns.2012.01.013; Fredrik Liljeros, Christofer R. Edling, Luís A. Nunes Amaral, et al., “The Web of Human Sexual Contacts,” Nature 411, no. 640 (2001): 907–​ 908, https://​doi.org/​10.1038/​35082​140; Bent Flyvbjerg, Alexander Budzier, and Daniel Lunn, “Regression to the Tail: Why the Olympics Blow Up,” EPA: Economy and Space 53, no. 2 (2021): 233–​260, https://​doi.org/​10.1177/​03085​18X2​0958​724; D. Brockmann, L. Hufnagel, and T. Geisel, “The Scaling Laws of Human Travel,” Nature 439 (2006): 462–​465, https://​doi.org/​10.1038/​natu​re04​292. 116. Albert-​Laszlo Barabasi and Reka Albert, “Emergence of Scaling in Random Networks,” Science 286, no. 539 (1999): 509–​512, https://​doi.org/​10.1126/​scie​nce.286.5439.509. 117. Saez and Zucman, The Triumph of Injustice. 118. Greg Leiserson and Danny Yagan, “What Is the Average Federal Individual Income Tax Rate on the Wealthiest Americans?,” White House Blog, September 23, 2021, https://​www.whi​ teho​use.gov/​cea/​blog/​2021/​09/​23/​what-​is-​the-​aver​age-​fede​ral-​ind​ivid​ual-​inc​ome-​tax-​ rate-​on-​the-​wea​lthi​est-​americ​ans/​. They take the methodologically bold step of treating unrealized capital gains as income, on the grounds that the current value of capital wealth can be used to finance consumption and can be left to heirs by taking advantage of the step-​up in basis tax rule. That the current market value of capital assets can be converted to income was demonstrated by the fact many of the wealthiest individuals avoid paying income tax altogether by putting up shares of their stocks as collateral for loans, providing them with income, while giving them the ability to deduct interest payments from their taxable income. See Jesse Eisinger, Jeff Ernsthausen, and Paul Kiel, “The Secret IRS Files; Trove of Never-​ Before-​Seen Records Reveal How the Wealthiest Avoid Income Tax,” Pro Publica, June 8, 2021, https://​www.pro​publ​ica.org/​arti​cle/​the-​sec​ret-​irs-​files-​trove-​of-​never-​bef​ore-​seen-​ reco​rds-​rev​eal-​how-​the-​wea​lthi​est-​avoid-​inc​ome-​tax. 119. Chuck Collins et al., “Silver Spoon Oligarchs: How America’s 50 Largest Inherited-​Wealth Dynasties Accelerate Inequality,” Institute for Policy Studies, 2021, https://​ips-​dc.org/​rep​ ort-​ameri​cas-​wea​lth-​dynast​ies-​2021/​. 120. Gabaix and Landier, “Why Has CEO Pay Increased.” In a 2012 paper, Steven Kaplan cites the Gabaix and Landier paper as evidence for the argument that CEO pay is not disproportionate, given the market for talent that drives up compensation for the highest income lawyers, investment professionals, and managers of private-​equity companies. Steven N. Kaplan, “Executive Compensation and Corporate Governance in the U.S.: Perceptions, Facts, and Challenges,” NBER Working Paper 18395, September 2012, https://​doi.org/​ 10.3386/​w18​395.

 



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121. Lucian Bebchuk and Jesse Fried, Pay without Performance: The Unfulfilled Promise of Executive Compensation (Cambridge, MA: Harvard University Press, 2004). 122. Kaplan, “Executive Compensation,” 3. 123. Mankiw, “Defending the One Percent,” 24. 124. Mankiw, “Defending the One Percent,” 21–​24. 125. Jones, “Pareto and Piketty”; Paul M. Romer, “Two Strategies for Economic Development: Using Ideas and Producing Ideas,” World Bank Economic Review 6, supplement 1 (1992): 63–​91, https://​doi.org/​10.1093/​wber/​6.supp​l_​1.63; Philippe Aghion, Ufuk Akcigit, Antonin Bergeaud, Richard Blundell, and David Hemous, “Innovation and Top Income Inequality,” Review of Economic Studies 86 (2019): 1–​45, https://​doi.org/​ 10.1093/​res​tud/​rdy​027. 126. Jones, “Pareto and Piketty,” 32–​33. 127. Jones and Kim, “Schumpeterian Model.” 128. Examples of this political influence will be cited later, but it is worth pointing out that automobile dealers are among the most successful and politically influential categories of pass-​through businesses, in part because they have used their political clout at the state level to defeat legislation that would allow consumers to buy cars directly from automobile manufacturers. 129. Saez and Zucman, The Triumph of Injustice. 130. Lucian A. Bebchuk, K. J. Martijn Cremers, and Urs C. Peyer, “The CEO Pay Slice,” Journal of Financial Economics 102 (2011): 199–​221. 131. Dean Baker, Josh Bivens, and Jessica Schneider, “Reining in CEO Compensation and Curbing the Rise of Inequality,” Economic Policy Institute, June 4, 2019, 4. 132. Ric Marshall, “Are CEOs Paid for Performance? Evaluating the Effectiveness of Equity Incentives,” MSCI, July 25, 2016. 133. Marianne Bertrand and Sendhil Mullainathan, “Are CEOs Rewarded for Luck? The Ones without Principals Are,” Quarterly Journal of Economics 116, no. 3 (2001): 901–​932, https://​ doi.org/​10.1162/​003355​3015​2466​269. 134. Paul Krugman, “Krugman Wonks Out: Why Doesn’t Cutting Taxes on the Wealthy Work?,” New York Times, April 30, 2021. 135. Bebchuk, Cremers, and Peyer, “The CEO Pay Slice.” 136. Thomas Govan, “Was Plantation Slavery Profitable?,” Journal of Southern History 8, no. 4 (November 1942): 513–​535, https://​doi.org/​10.2307/​2192​092; Kenneth M. Stampp, The Peculiar Institution: Slavery in the Ante-​bellum South (New York: Alfred A. Knopf, 1956); Edward E. Baptist, The Half Has Never Been Told (New York: Basic Books, 2014); Daron Acemoglu and James A. Robinson, “The Rise and Decline of General Laws of Capitalism,” Journal of Economic Perspectives 29, no. 1 (2015): 3–​28, https://​doi.org/​10.1257/​jep.29.1.3. However, Acemoglu and Robinson refer to “labor market institutions and political equilibria” in discussing the extreme income inequality under apartheid rather than explicitly describing the hierarchical distribution of uncontested power dictating the terms of employment. 137. Govan, “Was Plantation Slavery Profitable?” 138. S. Max Edelson, Plantation Enterprise in Colonial South Carolina (Cambridge, MA: Harvard University Press, 2006). 139. Stampp, Peculiar Institution, 418; James L. Huston, “Property Rights in Slavery and the Coming of the Civil War,” Journal of Southern History 65, no. 2 (1999): 249–​286, https://​ doi.org/​10.2307/​2587​364; Baptist, Half Has Never Been Told, argues otherwise, but does not take into account the costs of maintaining the slave system, which was externalized to the government. 140. James M. Hunt, David A. Tandberg, and Toby J. Park, “Presidential Compensation and Institutional Revenues: Testing the Return on Investment for Public University Presidents,” Review of Higher Education 42, no. 2 (2019): 619–​ 640, https://​doi.org/​10.1353/​ rhe.2019.0009. 141. Benjamin Ginsberg, The Fall of the Faculty: The Rise of the Administrative University and Why It Matters (New York: Oxford University Press, 2011).

 

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142. Ashley N. Newton, “Executive Compensation, Organizational Performance, and Governance Quality in the Absence of Owners,” Journal of Corporate Finance 30 (2015): 195–​222, https://​doi.org/​10.1016/​j.jcorp​fin.2014.12.016. 143. Newton, “Executive Compensation,” 212. 144. Coleridge’s translation, line 470. 145. Guyton et al., “Tax Evasion.” The authors refine the estimates in earlier work by Johns and Slemrod, “Distribution of Income Tax Noncompliance.” 146. This point is echoed by former IRS senior economist Kim Bloomquist. See Kim M. Bloomquist, “Trends as Changes in Variance: The Case of Tax Noncompliance,” IRS Research Bulletin, Rev. 11-​1003 (2003); Kim M. Bloomquist, “Tax Evasion, Income Inequality and Opportunity Costs of Compliance,” National Tax Association Proceedings 96 (2003): 91–​ 104; Bloomquist, “The Tax Gap.” 147. Kim M. Bloomquist, “Regional Bias in IRS Audit Selection,” Tax Notes, March 4, 2019. 148. https://​www.irs.gov/​newsr​oom/​the-​tax-​gap; Barry W. Johnson and Peter J. Rose, “Federal Tax Compliance Research: Tax Gap Estimates for Tax Years 2011–​2013,” Internal Revenue Service Publication 1415 (Rev. 9-​2019), September 2019. 149. Guyton et al., “Tax Evasion.” 150. Yuen Yuen Ang, China’s Gilded Age: The Paradox of Economic Boom and Vast Corruption (New York: Cambridge University Press, 2020); Minxin Pei, China’s Crony Capitalism: The Dynamics of Regime Decay (Cambridge, MA: Harvard University Press, 2016); Andrew Wedeman, Double Paradox: Rapid Growth and Rising Corruption in China (Ithaca, NY: Cornell University Press, 2012); Melanie Manion, Corruption by Design: Building Clean Government in Mainland China and Hong Kong (Cambridge, MA: Harvard University Press, 2004). 151. Cf. Facundo Alvaredo et al., “Global Inequality Dynamics: New Findings from WID World,” NBER Working Paper 23119, February 2017, https://​doi.org/​10.1257/​aer.p20171​095. 152. “Why Do Street Names Change at Ponce?,” Atlanta Magazine, November 2019, https://​ www.atla​ntam​agaz​ine.com/​list/​you-​asked-​we-​answe​red-​34-​thi​ngs-​you-​proba​bly-​dont-​ know-​about-​atla​nta/​why-​do-​str​eet-​names-​cha​nge-​at-​ponce/​. 153. Trounstine, Segregation by Design. 154. Calculated from Socio-​Economic Panel Core 36 (International Edition, 95%), https://​ doi.org/​10.5684/​soep.core.v36i). Pretax and post-​tax measures take into account transfer payments to households such as social assistance, unemployment benefits, and pensions. In recent years, parts of eastern Germany have seen something of an economic boom. Cf. Guy Chazan and Joe Miller, “The Surprising Revival of Eastern Germany,” Financial Times, June 28, 2022. 155. Gopal K. Singh and Mohammad Siahpush, “Widening Socioeconomic Inequalities in US Life Expectancy, 1980–​2000,” International Journal of Epidemiology 35 (2006): 969–​979, https://​doi.org/​10.1093/​ije/​dyl​083. 156. https://​www.cdc.gov/​nchs/​data/​vsrr/​vsrr​023.pdf; https://​www.cdc.gov/​mmwr/​volu​ mes/​71/​wr/​mm711​7e1.htm. 157. CDC, “Life Expectancy at Birth for U.S. States and Census Tracts, 2010–​2015,” data from https://​www.cdc.gov/​nchs/​data-​visual​izat​ion/​life-​exp​ecta​ncy/​, accessed August 6, 2020. Adair, Oklahoma, has a population of about 5,000; Logan County about 2,300; Charlotte about 5,200. 158. Richard Fry and Paul Taylor, “The Growth of Residential Segregation by Income,” Pew Research Center, August 1, 2012; Reardon and Bischoff, “Growth in Residential Segregation.” 159. Graham and Pinto, “Geography of Desperation.” 160. Representative examples of the literature include Jeffrey G. Williamson, “Regional Inequality and the Process of National Development: A Description of the Patterns,” Economic Development and Cultural Change 13, no. 4, part 2 ( July 1965): 3–​84, https://​doi. org/​10.1086/​450​136; Gavin Wright, “The Economic Revolution in the American South,” Economic Perspectives 1, no. 1 (Summer 1987): 161–​178; Mancur Olson, “The South Will Fall Again: The South as Leader and Laggard in Economic Growth,” Southern Economic Journal 49, no. 4 (April 1983): 917–​932, https://​doi.org/​10.2307/​1058​096.

 



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161. Robert J. Barro, “Democracy and Growth,” Journal of Economic Growth 1 (1996): 1–​27, https://​doi.org/​10.1007/​BF0​0163​340; Robert J. Barro, Getting It Right: Markets and Choices in a Free Society (Cambridge, MA: MIT Press, 1996); Barro, “Convergence and Modernisation”; Robert J. Barro, Xavier Sala-​i-​Martin, Olivier Jean Blanchard, et al., “Convergence across States and Regions,” Brookings Papers on Economic Activity 1991, no. 1: 107–​182, https://​doi.org/​10.2307/​2534​639. 162. Douglass C. North, Institutions, Institutional Change, and Economic Performance (New York: Cambridge University Press, 1990). 163. Enrico Moretti, The New Geography of Jobs (New York: Mariner Books, 2013). They have also been used to analyze why the distribution of cities by size often follow’s a Zipf ’s law power law distribution. Cf. Krugman, “Confronting the Mystery of Urban Hierarchy.” 164. Barro et al., “Convergence across States and Regions”; Olson, “The South Will Fall Again.” 165. For China, we have sufficient data to be able to break down inequality into the components that are shared and those that are due to differences in average incomes across provinces, we find that only half of total inequality is common to them. Using the 2014 China Family Panel Studies data, which provides sufficiently large and representative samples of the population for a set of five widely different provinces (Liaoning, Shanghai, Henan, Guangdong, and Gansu), we find that fully a third of overall income inequality comes from differences across provinces, whereas less than half is shared between them. This of course is based on a very restricted sample, so we should be careful before generalizing it to the entire country. Nevertheless, it reveals the wide differences in income levels across provinces. The China Family Panel Studies (CFPS) is a nationally representative, annual longitudinal survey of Chinese communities, families, and individuals launched in 2010 by the Institute of Social Science Survey (ISSS) of Peking University, China. The CFPS is designed to collect ­individual-​, family-​, and community-​level longitudinal data in contemporary China. The studies focus on the economic, as well as the non-​economic, wellbeing of the Chinese population, with a wealth of information covering such topics as economic activities, education outcomes, family dynamics and relationships, migration, and health. The CFPS is funded by the Chinese government through Peking University. http://​www.isss.pku.edu.cn/​cfps/​en/​ index.htm. 166. Branko Milanovic, Worlds Apart: Measuring International and Global Inequality (Princeton, NJ: Princeton University Press, 2011). 167. Branko Milanovic, Global Inequality: A New Approach for the Age of Globalization (Cambridge, MA: Harvard University Press, 2016). 168. Christoph Lakner and Branko Milanovic, “Global Income Distribution: From the Fall of the Berlin Wall to the Great Recession,” World Bank Economic Review 30, no. 2 (2016): 203–​ 232, https://​doi-​org.ezp-​prod1.hul.harv​ard.edu/​10.1093/​wber/​lhv​039.   Note that the graph compares the growth of the incomes of the different portions of the income distribution over time. If a particular household was in the poorest decile at the beginning of the period and saw rapid growth of its income, it moves from one decile to another. But for each of those deciles, average income grew at a different rate. Those at the 80th percentile in the global distribution—​who would be the middle class of rich countries—​ saw almost no net income growth over the two decades from 1988 to 2008 relative to the global poor and the global rich.

Chapter 3 1. Jean Tirole, The Theory of Industrial Organization (Cambridge, MA: MIT Press, 1988). 2. Tirole, Theory of Industrial Organization, 66–​76. 3. Emmanuel Saez, “Striking It Richer: The Evolution of Top Incomes in the United States” (updated with 2017 final estimates), March 2, 2019, 14–​15. 4. Only among the top 1% and higher are incomes from capital higher than incomes from labor. Cf. data from http://​gabr​iel-​zuc​man.eu/​usd​ina/​. 5. Corruption and rent-​seeking are not the same. Much rent-​seeking is legal (such as lobbying). But much corruption is motivated by the desire to acquire or distribute rents.

 

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6. https://​www.econom​ist.com/​the-​ameri​cas/​2017/​09/​07/​how-​one-​man-​and-​his-​lawy​ers-​ slow-​us-​can​ada-​traf​fi c; https://​www.mlive.com/​polit​ics/​2012/​11/​mic​higa​n_​pr​opos​al_​6​_​ cal​l_​fo​r_​v.html. 7. Lawrence F. Katz and Lawrence H. Summers, “Industry Rents: Evidence and Implications,” Brookings Papers on Economic Activity: Microeconomics 1989: 209–​290. 8. Monopsony refers to the power of a single buyer, such as the employer in a one-​company town, whereas monopoly refers to the power of a single seller or producer. 9. Josh Bivens, Lawrence Mishel, and John Schmitt, “It’s Not Just Monopoly and Monopsony: How Market Power Has Affected American Wages,” Economic Policy Institute, April 25, 2018; Kate Bronfenbrenner, “No Holds Barred: The Intensification of Employer Opposition to Organizing,” Economic Policy Institute and American Rights at Work Education Fund, EPI Briefing Paper no. 235, and Fact Sheet, May 20, 2009; Annette Bernhardt et al., “Broken Laws, Unprotected Workers: Violations of Employment and Labor Laws in America’s Cities,” National https://​www.nelp.org/​publ​icat​ion/​bro​ken-​laws-​unpr​ otec​ted-​work​ers-​vio​lati​ons-​of-​emp​loym​ent-​and-​labor-​laws-​in-​ameri​cas-​cit​ies/​.   Richard B. Freeman and James L. Medoff, What Do Unions Do? (New York: Basic Books, 1984); Josh Bivens and Heidi Shierholz, “What Labor Market Changes Have Generated Inequality and Wage Suppression?,” Economic Policy Institute, December 12, 2018, https://​ www.epi.org/​publ​icat​ion/​w hat-​labor-​mar​ket-​chan​ges-​have-​genera​ted-​ine​qual​ity-​and-​ wage-​supp​ress​ion-​emplo​yer-​power-​is-​sign​ific​ant-​but-​larg​ely-​const​ant-​w her​eas-​work​ers-​ power-​has-​been-​ero​ded-​by-​pol​icy-​acti​ons/​; Evan Starr, J. J. Prescott, and Norman Bishara, “Noncompetes in the U.S. Labor Force,” University of Michigan Law and Economics Research Paper no. 18-​013, April 12, 2019; Suresh Naidu, Eric Posner, and Glen Weyl, “More and More Companies Have Monopoly Power over Workers’ Wages. That’s Killing the Economy,” Vox, April 6, 2018, https://​www.vox.com/​the-​big-​idea/​2018/​4/​6/​17204​808/​wages-​employ​ers-​ work​ers-​monops​ony-​gro​wth-​sta​gnat​ion-​ine​qual​ity.   Jane Flanagan, “It’s Not Just Noncompetes—​Increased use of Anti-​competitive Contracts Has Limited Workers’ Bargaining Power and Employers’ Hiring Power,” EPI Blog, August 28, 2019, https://​www.epi.org/​blog/​its-​not-​just-​nonc​ompe​tes-​increa​sed-​use-​of-​anti-​comp​etit​ ive-​contra​cts-​has-​limi​ted-​work​ers-​bar​gain​ing-​power-​and-​employ​ers-​hir​ing-​power/​ 10. Anna Stansbury and Lawrence H. Summers, “The Declining Worker Power Hypothesis: An Explanation for the Recent Evolution of the American Economy,” NBER Working Paper 27193, May 2020; Susanto Basu, “Are Price-​Cost Markups Rising in the United States? A Discussion of the Evidence,” Journal of Economic Perspectives 33, no. 3 (2019): 3–​22; Gustavo Grullon, Yelena Larkin, and Roni Michaely, “Are U.S. Industries Becoming More Concentrated?,” August 2017, https://​pap​ers.ssrn.com/​sol3/​pap​ers.cfm?abst​ract​_​id=​ 2612​047; Efraim Benmelech, Nittai Bergman, and Hyunseob Kim, “Strong Employers and Weak Employees: How Does Employer Concentration Affect Wages?,” NBER Working Paper 24307, February 2018, http://​www.nber.org/​pap​ers/​w24​307; Lina M. Khan and Sandeep Vaheesan, “Market Power and Inequality: The Antitrust Counterrevolution and Its Discontents,” Harvard Law and Policy Review 11 (2017): 235–​294; Joshua Gans, Andrew Leigh, Martin Schmalz, and Adam Triggs, “Inequality and Market Concentration, When Shareholding Is More Skewed Than Consumption,” NBER Working Paper 25395, December 2018, http://​www.nber.org/​pap​ers/​w25​395; Jason Furman and Peter Orszag, “A Firm-​ Level Perspective on the Role of Rents in the Rise in Inequality,” October 16, 2015, http://​ goodt​imes​web.org/​ind​ustr​ial-​pol​icy/​2015/​20151016_​f irm_​level_​perspective_​on_​role​ _​of_​rent​s_​in​_​ine​qual​ity.pdf; William S. Comanor and Robert H. Smiley, “Monopoly and the Distribution of Wealth,” Quarterly Journal of Economics 89, no. 2 (May 1975): 177–​ 194; Jan DeLoecker, Jan Eeckhout, and Gabriel Unger, “The Rise of Market Power and the Macroeconomic Implications,” Quarterly Journal of Economics 135, no. 2 (2020): 561–​644; James Traina, “Is Aggregate Market Power Increasing? Production Trends using Financial Statements,” February 8, 2018, http://​dx.doi.org/​10.2139/​ssrn.3120​849. 11. Glenn-​Marie Lange, Quentin Wodon, and Kevin Carey, eds., The Changing Wealth of Nations: 2018. Building a Sustainable Future (Washington, DC: World Bank Group, 2018), 22; Richard M. Auty and Alan H. Gelb, “Political Economy of Resource-​Abundant States,” in Resource Abundance and Economic Development, ed. R. M. Auty (New York: Oxford

 



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University Press, 2004); Clifford G. Gaddy and Barry W. Ickes, “Russia’s Dependence on Resources,” in The Oxford Handbook of the Russian Economy, ed. Michael Alexeev and Shlomo Weber (New York: Oxford University Press, 2013); Clifford G. Gaddy and Barry W. Ickes, “Resource Rents and the Russian Economy,” Eurasian Geography and Economics 46, no. 8 (2005): 559–​583. 12. “Competition is for losers. . . . Actually, capitalism and competition are opposites. . . . Monopoly is therefore not a pathology or an exception. Monopoly is the condition of every successful business.” Peter Thiel, Wall Street Journal, September 12, 2014. 13. Laura Tyson and Michael Spence, “Exploring the Effects of Technology on Income and Wealth Inequality,” in After Piketty: The Agenda for Economics and Inequality, ed. Heather Boushey, J. Bradford DeLong, and Marshall Steinbaum (Cambridge, MA: Harvard University Press, 2017), 170–​208. 14. Jonathan B. Baker, The Antitrust Paradigm: Restoring a Competitive Economy (Cambridge, MA: Harvard University Press, 2019). 15. Lina M. Khan, “Amazon’s Antitrust Paradox,” Yale Law Journal 126 (2017): 710–​805; Khan and Vaheesan, “Market Power and Inequality”; Matthew Hindman, The Internet Trap: How the Digital Economy Builds Monopolies and Undermines Democracy (Princeton, NJ: Princeton University Press, 2018). 16. An often-​cited example is the Sonny Bono Copyright Term Extension Act of 1998. It added an additional 20 years to all current and future copyrights. Its intent was to protect the Disney company from having to open up Mickey Mouse images to public use.Mike Konczal, Freedom from the Market: America’s Fight to Liberate Itself from the Grip of the Invisible Hand (New York: New Press, 2021), 151. 17. Baker, The Antitrust Paradigm; Jonathan Baker and Steven Salop, “Antitrust, Competition Policy, and Inequality,” Georgetown Law Journal 104 (2015): 1–​28; Khan, “Amazon’s Antitrust Paradox”; Khan and Vaheesan, “Market Power and Inequality”; B. Dan Wood and James E. Anderson, “The Politics of U.S. Antitrust Regulation,” American Journal of Political Science 37, no. 1 (February 1993): 1–​13; Marc Allen Eisner and Kenneth J. Meier, “Presidential Control versus Bureaucratic Power: Explaining the Reagan Revolution in Antitrust,” American Journal of Political Science 34, no. 1 (February 1990): 269–​287; Filippo Lancieri, Eric A. Posner, and Luigi Zingales, “The Political Economy of Antitrust Enforcement in the United States,” NBER Working Paper 30326, August 2022. 18. Audrey Freedman, “A Fundamental Change in Wage Bargaining,” Challenge 25, no. 3 ( July–​ August 1982): 17. 19. Stephen Nickell, “Product Markets and Labour Markets,” Labour Economics 6 (1999): 2. 20. Nancy L. Rose, “Labor Rent Sharing and Regulation: Evidence from the Trucking Industry,” Journal of Political Economy 95, no. 6 (December 1987): 1146–​1178 21. Katz and Summers, “Industry Rents.” 22. Freeman and Medoff, What Do Unions Do? 23. Freeman and Medoff, What Do Unions Do? 24. David Card, “Deregulation and Labor Earnings in the Airline Industry,” NBER Working Paper 5687, July 1996. 25. Bivens, Mishel, and Schmitt, “It’s Not Just Monopoly”; Bronfenbrenner, “No Holds Barred”; Bernhardt et al., “Broken Laws, Unprotected Workers”; Freeman and Medoff, What Do Unions Do?; Bivens and Shierholz, “Labor Market Changes”; Starr, Prescott, and Bishara, “Noncompetes”; Naidu, Posner, and Weyl, “More and More Companies”; Alan B. Krueger, “The Rigged Labor Market,” Milken Institute, April 28, 2017, https://​www.milke​nrev​iew. org/​artic​les/​the-​rig​ged-​labor-​mar​ket. 26. James L. Huston, “Property Rights in Slavery and the Coming of the Civil War,” Journal of Southern History 65, no. 2 (1999): 249–​286. 27. Thomas F. Remington, Building Socialism in Bolshevik Russia: Ideology and Industrial Organization, 1917–​1921 (Pittsburgh, PA: University of Pittsburgh Press, 1984). 28. Wu Jinglian and Ma Guochan, Whither China? Restarting the Reform Agenda, trans. Xiaofeng Hua and Nancy Hearst (New York: Oxford University Press, 2016); “Wu Jinglian: Zhongguo pin fu xuanshu zhuyao yuanyin shi jihui bu pingdeng” (Wu Jinglian: The main reason for the

 

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disparity between poor and rich is inequality of opportunity), Fenghuang Online Finance, December 12, 2013; https://​fina​nce.ifeng.com/​a/​20131​227/​113​5667​8_​0.shtml   “Wu Jinglian: Pin fu xuanshu yuan yu jihui bu pingdeng ba fanfu he fan fu huntong shi cuo de” (Wu Jinglian: The reason for the disparity between poor and rich is inequality of opportunity. It is wrong to confuse anti-​corruption with anti-​rich), ifeng finance, February 20, 2010. http://​fina​nce.ifeng.com/​opin​ion/​spec​ial/​shour​ufen​pei/​zjgc/​20100​220/​1837​402.shtml. 29. Walter Eucken, Nationalökonomie—​wozu? (Leipzig: Felix Meiner Verlag, 1938); Walter Eucken, Die Grundlagen der Nationalökonomie, 2nd ed. (Godesberg: Verlag Helmut Küpper, 1947). 30. N. Gregory Mankiw, “Defending the One Percent,” Journal of Economic Perspectives 27, no. 3 (2013): 21–​22. 31. Quotation from Adam Smith, in the Wealth of Nations: The division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another. (Wealth of Nations, Book 1, ­chapter 2, paragraph 1) 32. Gordon Tullock, “The Welfare Costs of Tariffs, Monopoly, and Theft,” Economic Inquiry 5, no. 3 (1967): 224–​232. 33. Daniel A. Crane, “Lochnerian Antitrust,” NYU Journal of Law & Liberty 1, no. 1 (2005): 496–​ 514; Herbert Hovenkamp, “The Chicago School,” in The Making of Competition Policy: Legal and Economic Sources, ed. Daniel A. Crane and Herbert Hovenkamp (New York: Oxford University Press, 2015), 390–​444; Daniel A. Crane, “The Tempting of Antitrust: Robert Bork and the Goals of Antitrust Policy,” Antitrust Law Journal 79, no. 3 (2014): 835–​853; Daniel A. Crane, “Antitrust and Wealth Inequality,” Cornell Law Review 101 (2016): 1171–​1228; Chris Edmond, Virgiliu Midrigan, and Daniel Yi Xu, “How Costly Are Markups?,” NBER Working Paper 24800, July 2018. 34. George T. Stigler, “The Theory of Economic Regulation,” Bell Journal of Economics and Management Science 2, no. 1 (Spring 1971): 3–​21. 35. George J. Stigler, “Why Have the Socialists Been Winning?,” ORDO: Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft 30 (1979): 64, 68. 36. James M. Buchanan and Gordon Tullock, The Calculus of Consent: Logical Foundations of Constitutional Democracy (Ann Arbor: University of Michigan Press, 1962).   An influential article by Anne Krueger in 1974 expanded Tullock’s model of wasteful competition for rents to a theory of a “rent-​seeking society” and sought to measure how burdensome rent-​seeking was on society. Her example was the effort to win import licenses for consumption goods in India and Turkey. The cost to society included the cost of bidding for the license as well as the value of the forgone agricultural production. Consumers paid a higher price, but the monopoly owner of the import license received a higher income. Krueger estimated the total cost to society from these and other rent-​seeking activities for India (7.3% of national income) and Turkey (15%) in the mid-​1960s. These were very substantial amounts. As Branko Milanovic once observed, if barriers to competition impose a loss to society on the order of 2%–​3%, that is one thing. But if rents are equivalent to 20%–​ 30% of national income, that would attest to a significant role for political factors.   Economists have proposed a number of formal models of rent-​seeking and regulation, often simplifying the field of action to a two-​or three-​way interaction among rent-​seekers and policymakers to highlight their models’ basic elements. Some models posit an auction for benefits in which politicians award a policy benefit such as a tax break or procurement contract to the highest bidder. Still others have simplified rent-​seeking to a bilateral relationship between a single private interest and a politician.   See Anne O. Krueger, “The Political Economy of the Rent-​Seeking Society,” American Economic Review 64, no. 3 (1974): 291–​303; Branko Milanovic, “Bob Solow on Rents and Decoupling of Productivity and Wages,” globalinequality, May 2, 2015, https://​gli​neq.blogs​ pot.com/​2015/​05/​bob-​solow-​on-​rents-​and-​dec​oupl​ing-​of.html; Jean-​Jacques Laffont and Jean Tirole, “The Politics of Government Decision-​Making: A Theory of Regulatory Capture,”

 



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Quarterly Journal of Economics 106, no. 4 (1991): 1089–​1127; Nolan McCarty, “Complexity, Capacity, and Capture,” in Preventing Regulatory Capture: Special Interest Influence and How to Limit It, ed. Daniel Carpenter and David A. Moss (New York: Cambridge University Press, 2014), 113–​117; Edward Glaeser, Jose Scheinkman, and Andrei Shleifer, “The Injustice of Inequality,” NBER Working Paper 9150, September 2002; Sergei Guriev and Konstantin Sonin, “Dictators and Oligarchs: A Dynamic Theory of Contested Property Rights,” Journal of Public Economics 93 (2009): 1–​13. 37. Cited in William J. Novack, “A Revisionist History of Regulatory Capture,” in Preventing Regulatory Capture: Special Interest Influence and How to Limit It, ed. Daniel Carpenter and David A. Moss (New York: Cambridge University Press, 2014), 32. 38. George Stigler, interview by Thomas Hazlett, Reason, January 1984, https://​rea​son.com/​ 1984/​01/​01/​interv​iew-​with-​geo​rge-​stig​ler/​. 39. Nancy MacLean, Democracy in Chains: The Deep History of the Radical Right’s Stealth Plan for America (New York: Penguin Books, 2017). 40. For a brief, lucid exposition of the idea of political equality, see Robert A. Dahl, On Political Equality (New Haven, CT: Yale University Press, 2006). 41. MacLean, Democracy in Chains. 42. The same way of thinking is represented by ultralibertarians such as the Free State Movement. In a town in New Hampshire, activists from this movement demanded cutting the school budget in half on the grounds that “sports, music instruction and other typical school activities were not necessary to participate intelligently in a free government, and that using taxes to pay for them ‘crosses the boundary between public benefit and private charity.’ ” Dan Barry, “One Small Step for Democracy in a ‘Live Free or Die’ Town,” New York Times, July 10, 2022. 43. Douglass C. North, Institutions, Institutional Change, and Economic Performance (New York: Cambridge University Press, 1990); Douglass C. North and Barry R. Weingast, “Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-​Century England,” Journal of Economic History 49, no. 4 (1989): 803–​832. 44. Daron Acemoglu, Simon Johnson, and James A. Robinson, “The Colonial Origins of Comparative Development: An Empirical Investigation,” American Economic Review 91 (2001): 1369–​1401; Daron Acemoglu, Simon Johnson, and James A. Robinson, “Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution,” Quarterly Journal of Economics 117, no. 4 (2002): 1231–​1294; Mancur Olson, “Dictatorship, Democracy and Development,” American Political Science Review 87 (1993): 567–​576; Stephen Haber, Armando Razo, and Noel Maurer, The Politics of Property Rights: Political Instability, Credible Commitments and Economic Growth in Mexico, 1876–​ 1929 (New York: Cambridge University Press, 2003); Philip Keefer and Steven C. Knack, “Polarization, Politics and Property Rights: Links between Inequality and Growth,” Public Choice 111 (April 1–​2, 2002): 127–​154; Edward Glaeser, Rafael LaPorta, Florencio Lopes-​ de-​Silanes, and Andrei Shleifer. “Do Institutions Cause Growth?,” Journal of Economic Growth 9, no. 3 (2004): 271–​303; Christopher Clague, “The New Institutional Economics and Economic Development,” in Institutions and Economic Development, ed. Christopher Clague (Baltimore: Johns Hopkins University Press, 1997), 1–​13; Christopher Clague, Philip Keefer, Stephen Knack, and Mancur Olson, “Property and Contract Rights in Autocracies and Democracies,” Journal of Economic Growth 1, no. 2 (1996): 243–​276; ; Avner Greif, Paul Milgrom, and Barry R. Weingast, “Coordination, Commitment, and Enforcement: The Case of the Merchant Guild,” Journal of Political Economy 102, no. 4 (August 1994): 745–​776. 45. Pareto efficiency is a criterion for evaluating social welfare. A solution is said to be Pareto efficient if it leaves at least some better off, and no one worse off. 46. Buchanan and Tullock, The Calculus of Consent. 47. Heather Boushey, “A New Economic Paradigm,” Democracy 53 (Summer 2019): 170–​208. 48. Ernest Barker, ed., Social Contract: Essays by Locke, Hume, and Rousseau (Oxford: Oxford University Press, 1978). 49. Margaret Thatcher, interview for Woman’s Own, September 23, 1987, https://​www.marga​rett​ hatc​her.org/​docum​ent/​106​689. Her office later issued an elaboration of her position: All too often the ills of this country are passed off as those of society. Similarly, when action is required, society is called upon to act. But society as such does not exist

 

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except as a concept. Society is made up of people. It is people who have duties and beliefs and resolve. It is people who get things done. She prefers to think in terms of the acts of individuals and families as the real sinews of society rather than of society as an abstract concept. Her approach to society reflects her fundamental belief in personal responsibility and choice. To leave things to “society” is to run away from the real decisions, practical responsibility and effective action. (Statement issued to Sunday Times, July 10, 1988) 50. Michael C. Jensen and William H. Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” Journal of Financial Economics 3 (1976): 305–​360. 51. Sven Fischer, Sebastian J. Goerg, and Hanjo Hamann, “Cui Bono, Benefit Corporation? An Experiment Inspired by Social Enterprise Legislation in Germany and the US,” Review of Law and Economics 11, no. 1 (2015): 82. American B corporations—​benefit corporations—​which have spread in the United States since 2010, are expressly chartered to consider the interests of stakeholders broadly. 52. Guy Standing, Plunder of the Commons: A Manifesto for Sharing Public Wealth (London: Pelican, 2019). 53. Elinor Ostrom, Governing the Commons: The Evolution of Institutions for Collective Action (New York: Cambridge University Press, 1990). 54. Janine S. Hiller and Scott J. Shackelford, “The Firm and Common Pool Resource Theory: Understanding the Rise of Benefit Corporations,” American Business Law Journal 55, no. 1 (2018): 5–​51. 55. Alan Wolfe, “The Modern Corporation: Private Agent or Public Actor,” Washington and Lee Law Review 50, no. 4 (1993): 1673–​1694. 56. Joel Hellman, “Winners Take All: The Politics of Partial Reform in Postcommunist Transitions,” World Politics 50, no. 1 (1998): 203–​234. 57. William W. Lewis, The Power of Productivity: Wealth, Poverty, and the Threat to Global Stability (Chicago: University of Chicago Press, 2004), 13. 58. Jeffrey Sachs, Poland’s Jump to the Market Economy (Cambridge, MA: MIT Press, 1993); Jeffrey Sachs and Wing Thye Woo, “Structural Factors in the Economic Reforms of China, Eastern Europe, and the Former Soviet Union,” Economic Policy 9, no. 1 (1994): 101–​145; 59. Cf. Jim Leitzel’s argument that reform and competition will solve the problem of monopoly and monopoly rents, so that antitrust should not be a high priority for reform. He overlooks the fact that big firms have their own political interests and resources enabling them to thwart competition. Jim Leitzel, “A Note on Monopoly and Russian Economic Reform,” Communist Economies and Economic Transformation 6, no. 1 (1994): 45–​53; Simon Johnson and Heidi Kroll, “Managerial Strategies for Spontaneous Privatization,” Soviet Economy 7, no. 4 (1991): 281–​316; Maxim Boycko, Andrei Shleifer, and Robert W. Vishny, Privatizing Russia (Cambridge, MA: MIT Press, 1995); Paul L. Joskow, Richard Schmalensee, and Natalia Tsukanova, “Competition Policy in Russia during and after Privatization,” Brookings Papers on Economic Activity: Microeconomics 1994: 301–​374; Harry G. Broadman, “Reducing Structural Dominance and Entry Barriers in Russian Industry,” Review of Industrial Organization 17 (2000): 155–​176; Russell Pittman, “Some Critical Provisions in the Antimonopoly Laws of Central and Eastern Europe,” International Lawyer 26, no. 2 ( January 1, 1992): 485–​503; Sergei Guriev and Andrei Rachinsky, “Ownership Concentration in Russian Industry,” background paper for Russian CEM 2003, March 2004; Ekaterina Zhuravskaya and Evgeny Yakovlev, “State Capture and Controlling Owners of Firms,” CEFIR Working Paper no. 42, June 2004, https://​ssrn.com/​abstr​act=​572​170; Irina Slinko, Evgenii Yakovlev, and Ekaterina Zhuravskaya, “Institutional Subversion: Evidence from Russian Regions,” Centre for Economic Policy Research, Discussion Paper no. 4024, August 2003; Guriev and Sonin, “Dictators and Oligarchs”; Andrei Malenko, “Oligarchic Capitalism and Financial Development,” Problems of Economic Transition 49, no. 7 (2006): 70–​107; Eric Brunat and Xavier Richet, “Competitiveness and Adjustment of the Russian Economy: Macro and by Sectors Dimensions,” Economic Change 40 (2007): 65–​89; Anna A. Bykova, “The Impact of Industry’s Concentration on Innovation: Evidence from Russia,” Journal of Corporate Finance Research 11, no. 1 (2017): 37–​49; Peter Boone and Denis Rodionov, “Rent Seeking in Russia

 



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and the CIS,” paper prepared for European Bank for Reconstruction and Development 10th Anniversary Conference in London, December 2001; Malenko, “Oligarchic Capitalism”; Federal’naia antimonopol’naia sluzhba, Doklad o sostaianii konkurentsii v Rossiiskoi Federatsii, 2008 (Moscow: FAS, 2008); Federal’naia antimonopol’naia sluzhba, Doklad o sostaianii konkurentsii v Rossiiskoi Federatsii, 2011 (Moscow: FAS, 2011; Federal’naia antimonopol’naia sluzhba, Doklad o sostaianii konkurentsii v Rossiiskoi Federatsii za 2018 god (Moscow, 2019). 60. As the late British economist Anthony Atkinson put it, “The government’s actions cannot be treated as purely exogenous.” Anthony B. Atkinson, “Bringing Income Distribution in from the Cold,” Economic Journal 107 (March 1997): 315. 61. Louis Putterman, “The Role of Ownership and Property Rights in China’s Economic Transition,” China Quarterly 144 (1995): 1047–​1064. 62. For example, Yue Hou, The Private Sector in Public Office: Selective Property Rights in China (New York: Cambridge University Press, 2019). Similar theories have been proposed for Russia and Mexico as well. Cf. Guriev and Sonin, “Dictators and Oligarchs”; Haber, Razo, and Maurer, Politics of Property Rights.   Yuen Yuen Ang, China’s Gilded Age: The Paradox of Economic Boom and Vast Corruption (New York: Cambridge University Press, 2020). 63. Ang, China’s Gilded Age. 64. Lancieri, Posner, and Zingales, “Political Economy of Antitrust Enforcement.” 65. Robert Bork, The Antitrust Paradox: A Policy at War with Itself (New York: Basic Books, 1978). 66. Hovenkamp, “The Chicago School”; Khan and Vaheesan, “Market Power and Inequality”; Crane, “Antitrust and Wealth Inequality”; Crane, “The Tempting of Antitrust.” 67. Sam Peltzman, “Industrial Concentration under the Rule of Reason,” Journal of Law and Economics 57 (August 2014): S102. 68. Jensen and Meckling, “Theory of the Firm,” 310. 69. The 1997 statement explicitly declared, “The paramount duty of management and of boards of directors is to the corporation’s stockholders; the interests of other stakeholders are relevant as a derivative of the duty to stockholders. The notion that the board must somehow balance the interests of stockholders against the interests of other stakeholders fundamentally misconstrues the role of directors.” Business Roundtable, “Statement on Corporate Governance,” September 1997, 3. Cf. Ralph Gomory and Richard Sylla, “The American Corporation,” Daedalus 142, no. 2 (2013): 102–​118; Jay Lorsch and Rakesh Khurana, “Towards a New Paradigm for Executive Compensation,” Harvard Law School Forum on Corporate Governance and Financial Regulation, May 12, 2010, https://​corp​gov.law.harv​ ard.edu/​2010/​05/​12/​towa​rds-​a-​new-​parad​igm-​for-​execut​ive-​compe​nsat​ion/​. Note that the 1981 statement by the Business Roundtable explicitly endorsed the concept of “balancing” multiple stakeholders’ interests: Business Roundtable, “Statement on Corporate Responsibility,” October 1981, 8–​9. In 2019, The Business Roundtable returned to a modified version of its 1981 position, calling on corporations to recognize their commitment to “all of their stakeholders,” that is, customers, employees, suppliers, communities, and shareholders. Business Roundtable, “Statement on the Purpose of a Corporation,” August 2019. 70. Lorsch and Khurana, “Towards a New Paradigm”; Lucian Bebchuk and Jesse Fried, Pay without Performance: The Unfulfilled Promise of Executive Compensation (Cambridge, MA: Harvard University Press, 2004). 71. Rick Wartzman, The End of Loyalty: The Rise and Fall of Good Jobs in America (New York: Public Affairs, 2017). 72. Luigi Zingales, “Towards a Political Theory of the Firm,” Journal of Economic Perspectives 31, no. 3 (Summer 2017): 113–​130. 73. Sloan is quoted in Wartzman, The End of Loyalty, 18. 74. Frank Levy and Peter Temin, “Inequality and Institutions in 20th Century America,” NBER Working Paper 13106, May 2007, 5; cf. Ganesh Sitaraman, The Crisis of the Middle-​ Class Constitution: Why Economic Inequality Threatens Our Republic (New York: Knopf, 2017), 204; 75. Peltzman, “Industrial Concentration.” 76. Wood and Anderson, “Politics of U.S. Antitrust Regulation,” 22. 77. Eisner and Meier, “Presidential Control.”

 

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78. Derek Xiao, “The Role of Competition Policy and Market Power in Wage Inequality Differences between the United States and Canada, 2002–​2017,” senior thesis, Department of Government, Harvard College, March 2019, 64–​65. 79. Trump embraced antitrust law as a way of punishing digital technology companies that he accused of censoring him. After having cut the budget of the Federal Trade Commission and Department of Justice Antitrust Division in each of his first 3 years, Trump raised their budgets in the final year, and in fall 2020, as election were approaching, his administration filed major suits against Google and Facebook. 80. William E. Kovacic, “The Modern Evolution of U.S. Competition Policy Enforcement Norms,” Antitrust Law Journal 2 (2003): 377–​478; Lancieri, Posner, and Zingales, “Political Economy of Antitrust Enforcement.” 81. Theda Skocpol and Alexander Hertel-​Fernandez, “The Koch Network and Republican Party Extremism, Perspectives on Politics, September 2016, 681–​699; Alexander Hertel-​Fernandez, State Capture: How Conservative Activists, Big Businesses, and Wealthy Donors Reshaped the American States—​and the Nation (New York: Oxford University Press, 2019; Jacob S. Hacker, Off-​Center: The Republican Revolution and the Erosion of American Democracy (New Haven, CT: Yale University Press, 2005); Larry Bartels, Unequal Democracy: The Political Economy of the New Gilded Age, 2nd ed. (Princeton, NJ: Princeton University Press, 2016); Nolan McCarty, Keith Poole, and Howard Rosenthal, Polarized America: The Dance of Ideology and Unequal Riches, 2nd ed. (Cambridge, MA: MIT Press, 2016); Jacob S. Hacker and Paul Pierson, Winner-​Take-​All Politics (New York: Simon & Schuster, 2010). 82. Matthew D. Hill, G. Wayne Kelly, G. Brandon Lockhart, and Robert A. Van Ness, “Determinants and Effects of Corporate Lobbying,” Financial Management, Winter 2013, 931–​957. 83. Hill et al., “Determinants,” 944. 84. James Bessen, “Accounting for Rising Corporate Profits: Intangibles or Regulatory Rents?,” Boston University School of Law, Law & Economics Working Paper no. 16-​18, November 9, 2016, 31. 85. R. L. Hasen, Plutocrats United: Campaign Money, the Supreme Court, and the Distortion of American Elections (New Haven, CT: Yale University Press, 2016). 86. Vito J. Racanelli, “Strategas’ Lobbying Index Yields Fat Returns,” Barron’s, April 30, 2018, 16–​18. 87. Mancur Olson, The Logic of Collective Action: Public Goods and the Theory of Groups (Cambridge, MA: Harvard University Press, 1965); Kevin B. Grier, Michael C. Munger, and Brian E. Roberts, “The Determinants of Industry Political Activity, 1978–​1986,” American Political Science Review 88, no. 4 (December 1994): 911–​926; Stigler, “Theory of Economic Regulation,” 13; cf. Michael G. Williams and Charles W. Swenson, “A Model of Corporate Rent-​Seeking through Tax Legislation,” Journal of Accounting and Public Policy 18 (1999): 375–​394. 88. Grier, Munger, and Roberts, “Determinants of Industry Political Activity.” 89. In the next chapter I will detail the practice of purchasing seats in the legislatures of Russia and China and elaborate on the financing of campaigns in the United States. 90. Jon Bakija, Adam Cole, and Bradley T. Heim, “Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from U. S. Tax Return Data,” unpublished paper, April 2012, 8, https://​web.willi​ams.edu/​Econom​ics/​wp/​BakijaColeHei​mJob​ sInc​omeG​rowt​hTop​Earn​ers.pdf. 91. Bakija, Cole, and Heim, “Jobs and Income Growth,” 10. 92. Gauti B. Eggertson, Jacob A. Robbins, and Ella Getz Wold, “Kaldor and Piketty’s Facts: The Rise of Monopoly Power in the United States,” NBER Working Paper 24287, February 2018; Josh Bivens, “The Fed Shouldn’t Give Up on Restoring Labor’s Share of Income—​ and Measure It Correctly,” Working Economics Blog, Economic Policy Institute, January 30, 2019. 93. Freedman, “Fundamental Change,” 14–​17. 94. World Bank, World Development Indicators. 95. David Weil, The Fissured Workplace: Why Work Became So Bad for So Many and What Can Be Done to Improve It (Cambridge, MA: Harvard University Press, 2014).

 



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96. Bureau of Labor Statistics figures, https://​data.bls.gov/​pdq/​Surv​eyOu​tput​Serv​let; Gerald Mayer, “Union Membership Trends in the United States,” Congressional Research Service, August 31, 2004. 97. Bernd Fitzenberger, Karsten Kohn, and Qingwei Wang, “The Erosion of Union Membership in Germany: Determinants, Densities, Decompositions,” ZEW, Mannheim, Working Paper no. 06-​066, May 2006. The reason labor union membership fell in the East was the fact that the old communist-​run trade union federation was dismantled, and recruitment into the Federal Republic’s unions lagged. Long after unification, membership rates in the east remained lower. 98. Sean Ennis, Pedro Gonzaga, and Chris Pike, “Inequality: A Hidden Cost of Market Power,” OECD Competition Division, 2017, www.oecd.org/​daf/​comp​etit​ion/​ine​qual​ity-​a-​hid​ den-​cost-​of-​mar​ket-​power.htm; Sean F. Ennis and Yunhee Kim, “Market Power and Wealth Distribution,” in OECD and World Bank, A Step Ahead: Competition Policy, Shared Prosperity and Inclusive Growth (Washington, DC: World Bank Publishing, 2016), 133–​153. 99. They estimate that many more proposed mergers and cartels are abandoned than are blocked. Adreiaan Dierx, Fabienne Ilzkovitz, Beatrice Pataracchia, Marco Ratto, Anna Thum-​Thysen, and Janos Varga, “Does EU Competition Policy Support Inclusive Growth?,” Journal of Competition Law and Economics 13, no. 2 (2017): 238–​240. 100. Dierx et al., “EU Competition Policy.” 101. Ennis, Gonzaga and Pike, “Inequality; Simcha Barkai, “Declining Labor and Capital Shares,” Chicago Booth Stigler Center for the Study of the Economy and the State, New Working Paper Series no. 2, November 2016, 21; Xavier Raurich, Hector Sala, and Valeri Sorolla, “Factor Shares, the Price Markup, and the Elasticity of Substitution between Capital and Labor,” Journal of Macroeconomics 34 (2012): 182; DeLoecker, Eeckhout, and Unger, “Rise of Market Power.” 102. Thomas Piketty, Capital in the Twenty-​First Century (Cambridge, MA: Harvard University Press, 2014). There is a fierce debate among economists about these issues. See, for example, Loukas Karabarbounis and Brent Neiman, “The Global Decline of the Labor Share,” Quarterly Journal of Economics 129, no. 1 (February 2014): 61–​104; Tyson and Spence, “Exploring the Effects,” 170–​208; Eggertson, Robbins, and Wold, “Kaldor and Piketty’s Facts”; Bivens, “The Fed Shouldn’t Give Up.” 103. Basu, “Price-​ Cost Markups”; Stansbury and Summers, “Declining Worker Power Hypothesis.” 104. Some “superstar” firms have gained a dominant market position globally by using technology successfully. In these firms, the higher productivity of both capital and labor allow them to reduce the share of profits returned to labor. Economists David Autor and others have reviewed multiple industries, and find that industries with superstar firms have higher market concentration and the superstar firms have a lower labor share. They also note, though, that firms that outcompete their rivals through technological innovation may use their influence to protect themselves from further competition. This in keeping with the argument I am making that “early winners” subsequently ally with their political protectors to ensure a continuing stream of rents. See David Autor, David Dorn, Lawrence F. Katz, et al., “The Fall of the Labor Share and the Rise of Superstar Firms,” NBER Working Paper 23396, May 2017; Jae Song, David J. Price, Fatih Guvenen, Nicholas Bloom, and Till von Wachter, “Firming up Inequality,” NBER Working Paper 21199, May 2015; Furman and Orszag, “Firm-​Level Perspective.” 105. Katie A. Meyer, David Guilkey, Shu Wen Ng, et al., “Sociodemographic Differences in Fast Food Price Sensitivity,” JAMA Internal Medicine 174, no. 3 (2014): 434–​442; Lisa M. Powell, “Fast Food Costs and Adolescent Body Mass Index: Evidence from Panel Data,” Journal of Health Economics 28, no. 5 (2009): 963–​970; Kiyah J. Duffey, Penny Gordon-​Larsen, James M. Shikany, et al., “Food Price and Diet and Health Outcomes: 20 Years of the CARDIA Study,” JAMA Internal Medicine 170, no. 5 (2020): 420–​426, https://​doi.org/​10.1001/​ archin​tern​med.2009.545; Marie Donahue and Stacy Mitchell, “Report: Dollar Stores Are Targeting Struggling Urban Neighborhoods and Small Towns. One Community Is Showing How to Fight Back,” Institute for Local Self-​Reliance, December 6, 2018, https://​ilsr.org/​ dol​lar-​sto​res-​tar​get-​cit​ies-​towns-​one-​fig​hts-​back/​.

 

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106. William F. Owen, Richard Carmona, and Claire Pomeroy, “Failing Another National Stress Test on Health Disparities,” JAMA 323, no. 1 (2020): 1905–​1906; Clyde W. Yancy, “COVID-​ 19 and African Americans,” JAMA 323, no. 19 (2020): 1891–​1892; Tori L. Cowger, Brigette A. Davis, Onisha S. Etkins, et al., “Comparison of Weighted and Unweighted Population Data to Assess Inequities in Coronovirus Disease 2019 Deaths by Race/​Ethnicity Reported by the US Centers for Disease Control and Prevention,” JAMA Network Open, July 28, 2020, 1–​4. 107. Bureau of Labor Statistics, Economic News Release, Productivity and Costs, Various Years. https://​www.bls.gov/​news.rele​ase/​prod2  .  t  01  .htm. 108. https://​data.bls.gov/​pdq/​Surv​eyOu​tput​Serv​let; US Bureau of Labor Statistics, “A Look at Pay at the Top, the Bottom, and In Between,” May 2015, https://​www.bls.gov/​spotli​ght/​ 2015/​a-​look-​at-​pay-​at-​the-​top-​the-​bot​t om-​and-​in-​betw​een/​home.htm. 109. David Dayen, Monopolized: Life in the Age of Corporate Power (New York: New Press, 2020); Tim Wu, The Curse of Bigness: Antitrust in the New Gilded Age (New York: Columbia Global Reports, 2018); Thomas Philippon, The Great Reversal: How America Gave Up on Free Markets (Cambridge, MA: Harvard University Press, 2019); Heather Boushey, Unbound: How Inequality Constricts Our Economy and What We Can Do about It (Cambridge, MA: Harvard University Press, 2019). 110. Skocpol and Hertel-​Fernandez, “Koch Network”; Hertel-​Fernandez, State Capture; Hacker, Off-​Center; Bartels, Unequal Democracy; McCarty, Poole, and Rosenthal, Polarized America; Hacker and Pierson, Winner-​Take-​All Politics.

Chapter 4 1. On these reforms, see Jacob S. Hacker, “Privatizing Risk without Privatizing the Welfare State: The Hidden Politics of Social Policy Retrenchment in the United States,” American Political Science Review 98, no. 2 (May 2004): 243–​260, https://​doi.org/​10.1017/​S00030​ 5540​4001​121; Jacob S. Hacker and Paul Pierson, Winner-​Take-​All Politics (New York: Simon & Schuster, 2010); Larry M. Bartels, Unequal Democracy: The Political Economy of the New Gilded Age (Princeton, NJ: Princeton University Press, 2008); B. Dan Wood and James E. Anderson, “The Politics of U.S. Antitrust Regulation,” American Journal of Political Science 37, no. 1 (February 1993): 1–​13, https://​doi.org/​10.2307/​2111​522; Marc Allen Eisner and Kenneth J. Meier, “Presidential Control versus Bureaucratic Power: Explaining the Reagan Revolution in Antitrust,” American Journal of Political Science 34, no. 1 (February 1990): 269–​287, https://​doi.org/​10.2307/​2111​519. 2. William A. Niskanen, “Economic Deregulation in the United States: Lessons for America, Lessons for China,” Cato Journal 8, no. 3 (Winter 1989): 657–​668. 3. David Card, “Deregulation and Labor Earnings in the Airline Industry,” NBER Working Paper 5687, July 1996, 6. 4. Niskanen, “Economic Deregulation,” 659. 5. Kevin Okoeguale and Robert Loveland, “Competition and Merger Activity in the U.S. Telecommunications Industry,” Journal of Financial Research 41, no. 1 (Spring 2018): 33–​65, https://​doi.org/​10.1111/​jfir.12138. 6. Sam Peltzman, “Industrial Concentration under the Rule of Reason,” Journal of Law and Economics 57 (August 2014): S101–​S120, https://​doi.org/​10.1086/​675​719. 7. Nicholas Short, “The Politics of the American Knowledge Economy,” Studies in American Political Development 36, no. 1 (2022): 41–​60, https://​doi.org/​10.1017/​S08985​88X2​ 1000​134. 8. Lawrence H. Summers, “Competition Policy in the New Economy,” Antitrust Law Journal 69, no. 1 (2001): 355. 9. Short, “American Knowledge Economy.” 10. Raghuram Rajan, The Third Pillar: How Markets and the State Leave the Community Behind, Kindle ed. (New York: Penguin Press, 2019), loc. 3222. 11. Trevis Tearn, “How M&A Has Driven the Consolidation of the US Airline Industry over the Last Decade?,” Forbes, May 4, 2016; Severin Borenstein and Nancy L. Rose, “How Airline Markets Work . . . or Do They? Regulatory Reform in the Airline Industry,” NBER

 



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Working Paper 13452, September 2007; Drew Harwell, Ashley Halsey III, and Thad Moore, “Justice Dept. Investigating Potential Airline Price Collusion,” Washington Post, July 1, 2015; Kenneth M. Mead, “Factors Affecting Concentration in the Airline Industry,” GAO, Testimony, September 22, 1988, before the Committee on Commerce, Science, and Transportation, US Senate; Ahren Johnston and John Ozment, “Concentration in the Airline Industry: Evidence of Economies of Scale?,” Journal of Transportation Management 22, no. 2 (2011): 59–​74, https://​doi.org/​10.22237/​jotm/​131​7427​500. 12. Nancy L. Rose, “Labor Rent Sharing and Regulation: Evidence from the Trucking Industry,” Journal of Political Economy 95, no. 6 (December 1987): 1146–​1178, https://​doi.org/​ 10.1086/​261​509. 13. William S. Comanor and F. M. Scherer, “Mergers and Innovation in the Pharmaceutical Industry,” Journal of Health Economics 32 (2013): 107, https://​doi.org/​10.1016/​j.jheal​ eco.2012.09.006. 14. Thomas Gryta et al., “AT&T Reaches Deal to Buy Time Warner for $85.4 Billion,” Wall Street Journal, October 22, 2016. 15. Tim Wu, The Curse of Bigness: Antitrust in the New Gilded Age (New York: Columbia Global Reports, 2018); Jonathan Tepper and Denise Hearn, The Myth of Capitalism: Monopolies and the Death of Competition (New York: Wiley, 2018); Jonathan B. Baker and Steven C. Salop, “Antitrust, Competition Policy, and Inequality,” Georgetown Law Journal Online 104 (2015): 1–​28; Jonathan B. Baker, “The Case for Antitrust Enforcement,” Journal of Economic Perspectives 17, no. 4 (Fall 2003): 27–​50, https://​doi.org/​10.1257/​089​5330​0377​2034​ 880; Lina M. Khan and Sandeep Vaheesan, “Market Power and Inequality: The Antitrust Counterrevolution and Its Discontents,” Harvard Law and Policy Review 11 (2017): 235–​294.   Similarly, Grullon et al. find that more than three quarters of US industries became more concentrated over the past two decades. Moreover, in those industries where concentration is highest, profit margins are higher as are stock returns. See Gustavo Grullon, Yelena Larkin, and Roni Michaely, “Are U.S. Industries Becoming More Concentrated?,” August 2017, https://​pap​ers.ssrn.com/​sol3/​pap​ers.cfm?abst​ract​_​id=​2612​047. 16. See Peltzman, “Industrial Concentration.” 17. Michael A. Salinger, “Tobin’s q, Unionization, and the Concentration-​Profits Relationship,” Rand Journal of Economics 15, no. 2 (Summer 1984): 159–​170, https://​doi.org/​10.2307/​ 2555​673. Salinger claimed that Tobin’s Q was not high. However, his data ended in 1970s and did not observe the sustained high values of the Tobin’s Q measure for the stock market in recent decades. 18. Grullon, Larkin, and Michaely, “Are U.S. Industries Becoming More Concentrated?” 19. Grullon, Larkin, and Michaely, “Are U.S. Industries Becoming More Concentrated?”; Khan and Vaheesan, “Market Power and Inequality”; Joshua Gans, Andrew Leigh, Martin Schmalz, and Adam Triggs, “Inequality and Market Concentration: When Shareholding Is More Skewed Than Consumption,” NBER Working Paper 25395, December 2018, http://​ www.nber.org/​pap​ers/​w25​395; Jason Furman and Peter Orszag, “A Firm-​Level Perspective on the Role of Rents in the Rise in Inequality,” October 16, 2015, http://​goodt​imes​web. org/​ind​ustr​ial-​pol​icy/​2015/​20151016_​firm_​level_​perspective_​on_​role​_​of_​rent​s_​in​_​ ine​qual​ity.pdf; William S. Comanor and Robert H. Smiley, “Monopoly and the Distribution of Wealth,” Quarterly Journal of Economics 89, no. 2 (May 1975): 177–​194, https://​doi.org/​ 10.2307/​1884​423; Jan De Loecker and Jan Eeckhout, “The Rise of Market Power and the Macroeconomic Implications,” NBER Working Paper 23687, August 2017, https://​doi. org/​10.3386/​w23​687. 20. Louis D. Brandeis, “Competition,” American Legal News 24, no. 1 (1913): 13. 21. Wenting Ma, Paige Ouimet, and Elena Simintzi, “Mergers and Acquisitions, Technological Change and Inequality,” ECGI Finance Working Paper no. 485/​2016, January 2018. 22. Kevin Amess, Sourafel Girma, and Mike Wright, “The Wage and Employment Consequences of Ownership Change,” Managerial and Decision Economics 35 (2013): 161–​171, https://​ doi.org/​10.1002/​mde.2650. 23. Yan Liu, Carol Padgett, and Simone Varotto, “Corporate Governance, Bank Mergers, and Executive Compensation,” International Journal of Finance & Economics 22, no. 1 (2016): 12–​ 29, https://​doi.org/​10.1002/​ijfe.1565.

 

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24. Yaniv Grinstein and Paul Hribar, “CEO Compensation and Incentives: Evidence from M&A Bonuses,” Journal of Financial Economics 73 (2004): 119–​143, https://​doi.org/​10.1016/​j.jfin​ eco.2003.06.002. 25. Grinstein and Hribar, “CEO Compensation and Incentives,” 143. 26. Carl Shapiro, “Antitrust in a Time of Populism,” International Journal of Industrial Organization 61 (2018): 714–​748, https://​doi.org/​10.1016/​j.ijind​org.2018.01.001. 27. Monica Prasad, “The Popular Origins of Neoliberalism in the Reagan Tax Cut of 1981,” Journal of Policy History 24, no. 3 (2012): 351–​383, https://​doi.org/​10.1017/​S08980​3061​ 2000​103. 28. On the windfall oil tax, see Salvatore Lazzari, “The Crude Oil Windfall Profit Tax of the 1980s: Implications for Current Energy Policy,” Congressional Research Service, March 9, 2006. 29. Jerry Tempalski, “Revenue Effects of Major Tax Bills,” OTA Working Paper 81, revised September 2006, Department of the Treasury, https://​www.treas​ury.gov/​resou​rce-​cen​ter/​ tax-​pol​icy/​tax-​analy​sis/​Docume​nts/​WP-​81.pdf. 30. S corporations are generally smaller in size (they can have no more than 100 shareholders) than C corporations, which tend to be in industries requiring high capital investment. 31. Susan M. Whitman, “S Corporation Returns, 1995,” https://​www.irs.gov/​pub/​irs-​soi/​95sc​ orp.pdf. 32. Tom Petska, “Taxes and Organizational Choice: An Analysis of Trends, 1985–​1992,” Statistics of Income Bulletin 15, no. 4 (Spring 1996),https://​www.irs.gov/​pub/​irs-​soi/​85-​92tre​nds. pdf; Kelly Luttrell, “S-​Corporation Returns, 2003,” https://​www.irs.gov/​pub/​irs-​soi/​03sc​ orp.pdf; Whitman, “S Corporation Returns, 1995”; Internal Revenue Service, Data Book 2021 (Washington, DC: IRS, 2022), https://​www.irs.gov/​pub/​irs-​pdf/​p55b.pdf; Internal Revenue Service, Data Book 2019 (Washington, DC: IRS, 2020), https://​www.irs.gov/​sta​ tist​ics/​soi-​tax-​stats-​irs-​data-​book. 33. Internal Revenue Service, SOI Bulletin, Fall 2019, https://​www.irs.gov/​sta​tist​ics/​soi-​tax-​ stats-​soi-​bulle​tin-​fall-​2019; Internal Revenue Service, “SOI Tax Stats—​Individual High Income Tax Returns,” https://​www.irs.gov/​sta​tist​ics/​soi-​tax-​stats-​ind​ivid​ual-​high-​inc​ome-​ tax-​retu​rns. 34. See Petska, “Taxes and Organizational Choice”; Luttrell, “S-​Corporation Returns, 2003”; Whitman, “S Corporation Returns, 1995”; Internal Revenue Service, Data Book 2021; Internal Revenue Service, Data Book 2019; Internal Revenue Service, SOI Bulletin, Fall 2019; Internal Revenue Service, “SOI Tax Stats”; Justin Bryan, “High-​Income Tax Returns for Tax Year 2016,” https://​www.irs.gov/​pub/​irs-​soi/​soi-​a-​inhi-​id1​907.pdf 35. Bryan, “High-​Income Tax Returns.” 36. The median difference between AGI and expanded income was $3,551. Figures from Internal Revenue Service, “SOI Tax Stats.” 37. Anne Eberhardt, “The Controversy Surrounding the Corporate Transparency Act of 2019,” May 22, 2020, https://​www.corp​orat​ecom​plia​ncei​nsig​hts.com/​cont​rove​rsy-​corpor​ate-​trans​ pare​ncy-​act-​2019/​. 38. Matthew Smith, Danny Yagan, Owen M. Zidar, et al., “Capitalists in the Twenty-​First Century,” NBER Working Paper 25442, May 2019, https://​doi.org/​10.3386/​w25​442; Jonathan Rothwell, “Make Elites Compete: Why the 1% Earn So Much and What to Do about It,” Brookings Institution, March 25, 2016. 39. Rothwell, “Make Elites Compete,” 5–​6. 40. For example, Philippe Aghion, Ufuk Akcigit, Antonin Bergeaud, et al., “Innovation and Top Income Inequality,” Review of Economic Studies 86 (2019): 1–​45, https://​doi.org/​10.1093/​ res​tud/​rdy​027; Charles I. Jones, “Pareto and Piketty: The Macroeconomics of Top Income and Wealth Inequality,” Journal of Economic Perspectives 29, no. 1 (Winter 2015): 29–​46, https://​doi.org/​10.1257/​jep.29.1.29; Charles I. Jones and Jihee Kim, “A Schumpeterian Model of Top Income Inequality,” Journal of Political Economy 126, no. 5 (2018): 1785–​1826, https://​doi.org/​10.1086/​699​190. 41. For example, owners of S corporations can deduct 20% of the business income from their taxable income.

 



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42. Matthew Smith, Danny Yagan, Owen M. Zidar, and Eric Zwick, “Capitalists in the Twenty-​ First Century,” Oxford University Centre for Business Taxation, WP 18/​07, June 2018, 15. 43. Smith et al., “Capitalists in the Twenty-​First Century” (2018). 44. Francine Lafontaine and Fiona Scott Morton, “State Franchise Laws, Dealer Terminations, and the Auto Crisis,” Journal of Economic Perspectives 24, no. 3 (Summer 2010): 234. 45. On the automobile dealers’ influence and the effects of state regulatory protections for them, see Lafontaine and Morton, “State Franchise Laws”; Mike Ramsey and Valerie Bauerlein, “Tesla Clashes with Car Dealers,” Wall Street Journal, June 18, 2013; Daniel A. Crane, “Tesla and the Car Dealers’ Lobby,” Regulation, Summer 2014, 10–​14; Gerald R. Bodisch, “Economic Effects of State Bans on Direct Manufacturer Sales to Car Buyers,” Economic Analysis Group, Antitrust Division, US Department of Justice, EAG 09-​1 CA, May 2009; Andrew I. Gavil, Deborah Feinstein, and Martin S. Gaynor, US Federal Trade Commission, letter to Paul D. Moriarty, General Assembly, State of New Jersey, May 16, 2014; Francine Lafontaine and Margaret Slade, “Exclusive Contracts and Vertical Restraints: Empirical Evidence and Public Policy,” February 2005, paper prepared for conference on Advances in the Economics of Competition, June 2005, Rome, Italy; Richard L. Smith II, “Franchise Regulation: An Economic Analysis of State Restrictions on Automobile Distribution,” Journal of Law & Economics 25, no. 1 (April 1982): 125–​157, https://​doi.org/​10.1086/​467​010; Neil Irwin, “Auto Dealers and State Legislatures Conspire to Make Cars More Expensive. Can Tesla Change That?,” Washington Post, May 14, 2013. 46. Jacob S. Hacker, Off-​Center: The Republican Revolution and the Erosion of American Democracy (New Haven, CT: Yale University Press, 2005); Bartels, Unequal Democracy, 162ff. 47. Thomas L. Hungerford, “Taxes and the Economy: An Economic Analysis of the Top Tax Rates since 1945,” Congressional Research Service, September 14, 2012, 1–​2. 48. Meg Wiehe, Aidan Davis, Carl Davis, Matt Gardner, Lisa Christensen Gee, and Dylan Grundman, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, 6th ed. (Washington, DC: Institute on Taxation and Economic Policy, October 2018). 49. Hungerford, “Taxes and the Economy”; Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva, “Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities,” NBER Working Paper 17616, November 2011, https://​doi.org/​10.1257/​pol.6.1.230. 50. Suresh Nallareddy, Ethan Rouen, and Juan Carlos Suarez Serrato, “Corporate Tax Cuts Increase Inequality,” NBER Working Paper 24598, May 2018, https://​doi.org/​10.3386/​ w24​598. 51. David Hope and Julian Limberg, “The Economic Consequences of Major Tax Cuts for the Rich,” LSE International Inequalities Institute Working Paper 55, December 2020, https://​ doi.org/​10.1093/​ser/​mwab​061. 52. The National Association of Realtors spent $22.2 million in the fourth quarter of 2017 alone on lobbying. Cf. Richard Lardner, “Money Spent on Lobbying Skyrocketed during Tax Overhaul,” AP News, February 12, 2018, https://​www.apn​ews.com/​bd8a8​78c5​fe84​ea48​ffbc​ f05b​4edb​a0e. 53. The Business Roundtable spent $17.3 million on lobbying in the fourth quarter of 2017, almost four times the amount spent in the previous quarter. The US Chamber of Commerce spent $16.8 million. Cf. Lardner, “Money Spent.” 54. Ben Steverman, Dave Merrill, and Jeremy C. F. Lin, “A Year after the Middle Class Tax Cut, the Rich Are Winning,” Bloomberg News, December 18, 2018, https://​www.bloomb​erg.com/​ graph​ics/​2018-​tax-​plan-​conse​quen​ces/​. 55. Steverman, Merrill, and Lin, “A Year After.” 56. Seth Hanlon, “How the Tax Act Embodies the Republican Culture of Corruption,” American Prospect, June 27, 2018, https://​prosp​ect.org/​arti​cle/​how-​tax-​act-​embod​ies-​rep​ubli​can-​cult​ ure-​cor​rupt​ion. 57. Steverman, Merrill, and Lin, “A Year After.” 58. Hungerford, “Taxes and the Economy.” 59. Debbie Cenziper and Will Fitzgibbon, “The ‘Cowboy Cocktail’: How Wyoming Became One of the World’s Top Tax Havens,” Washington Post, December 20, 2021. 60. Kathleen Hall Jamieson and Joseph N. Cappella, Echo Chamber: Rush Limbaugh and the Conservative Media Establishment (New York: Oxford University Press, 2008).

 

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61. George J. Stigler, Ward S. Bowman, Ronald H. Coase, Roger S. Cramton, Kenneth W. Dam, Raymon H. Mulford, Richard A. Posner, Peter O. Steiner, and Alexander L. Stott, “Report of the Task Force on Productivity and Competition,” Antitrust Law & Economics Review 2, no. 3 (Spring 1969): 13–​36. 62. William E. Kovacic, “The Modern Evolution of U.S. Competition Policy Enforcement Norms,” Antitrust Law Journal 2 (2003): 377–​478; Filippo Lancieri, Eric A. Posner, and Luigi Zingales, “The Political Economy of Antitrust Enforcement in the United States,” NBER Working Paper 30326, August 2022, https://​doi.org/​10.3386/​w30​326. As of July 2022, the department’s website explained that due to the high volume of premerger notifications filed, the department had not yet tabulated workload figures for 2020 and 2021. 63. Lancieri, Posner, and Zingales, “Political Economy of Antitrust Enforcement.” 64. John Kwoka, Mergers, Merger Control, and Remedies: A Retrospective Analysis of U. S. Policy (Cambridge, MA: MIT Press, 2015), 9–​10. 65. Kwoka, Mergers, 117. 66. In June 2019, the Democratic majority of the US House of Representatives Subcommittee on Antitrust, Commercial and Administrative Law of the Judiciary Committee launched a wide-​ranging investigation into anticompetitive behavior by Amazon, Apple, Facebook and Google. The investigation lasted 15 months and gathered around 1.3 million documents. The subcommittee issued its report in October 2020. The report attracted wide press and public attention.   The report concluded that Amazon, as both a marketplace and a retailer, was abusing its power, for example by harvesting product and sales data from other sellers in order to offer its own competing products, often copied from theirs and often at a lower price. It found that Apple held a monopoly on apps for its iPhone and iPad products, which allow it to squeeze “supra-​normal profits” from the developers of apps used on its devices, and that it favored its own apps by preinstalling them on its devices. Facebook, it found, holds a monopoly in social networking, using it to suppress rival platforms. By purchasing potential rivals and suppressing their ability to peel away users, it also fosters an “internal monopoly,” in the words of one employee. Facebook’s hoard of user data also poses an enormous threat to privacy. Finally, the report concluded that Google holds a monopoly in search and uses anticompetitive methods to maintain it. Among other threats, its possession of huge amounts of personal data give it “near-​perfect market intelligence.”   See Subcommittee on Antitrust, Commercial and Administrative Law of the Committee on the Judiciary, US House of Representatives, “Investigation of Competition in Digital Markets,” Washington, DC, 2020. Also see Ryan Tracy, “House Panel Says Big Tech Wields Monopoly Power,” Wall Street Journal, October 6, 2020; Mike Isaac, Steve Lohr, Jack Nicas, and Daisuke Wakabayashi, “12 Accusations in the Damning House Report on Amazon, Apple, Facebook and Google,” New York Times, October 6, 2020. 67. On public opinion changes, see Aaron Smith, “Public Attitudes toward Technology Companies,” Pew Research Center, June 28, 2018; Brooke Auxier, “How Americans See U.S. Tech Companies as Government Scrutiny Increases,” Pew Research, October 26, 2020. 68. Subcommittee on Antitrust Commercial and Administrative Law of the Committee on the Judiciary, “Investigation of Competition in Digital Markets: Majority Staff Report and Recommendations,” https://​int.nyt.com/​data/​docume​ntto​ols/​house-​antitr​ust-​rep​ort-​on-​ big-​tech/​b2ec2​2cf3​40e1​af1/​full.pdf. 69. Cecilia Kang and David McCabe, “Antitrust Overhaul Passes Its First Tests. Now, the Hard Parts,” New York Times, June 24, 2021. 70. Amy Klobuchar, Antitrust: Taking on Monopoly Power from the Gilded Age to the Digital Age (New York: Knopf, 2021. 71. Thomas Byrne Edsall, The New Politics of Inequality (New York: Norton, 1984); Thomas B. Edsall, Building Red America: The New Conservative Coalition and the Drive for Permanent Power (New York: Basic Books, 2007); Hacker and Pierson, Winner-​Take-​All Politics; Kate Bronfenbrenner, “No Holds Barred: The Intensification of Employer Opposition to Organizing,” Economic Policy Institute and American Rights at Work Education Fund, EPI Briefing Paper no. 235, May 20, 2009.

 



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72. Joseph A. McCartin, “The Strike That Busted Unions,” New York Times, August 2, 2011. 73. Richard B. Freeman and James L. Medoff, What Do Unions Do? (New York: Basic Books, 1984). 74. Josh Bivens and Heidi Shierholz, “What Labor Market Changes Have Generated Inequality and Wage Suppression?,” Economic Policy Institute, December 12, 2018, https://​www.epi. org/​publ​icat​ion/​what-​labor-​mar​ket-​chan​ges-​have-​genera​ted-​ine​qual​ity-​and-​wage-​supp​ress​ ion-​emplo​yer-​power-​is-​sign​ific​ant-​but-​larg​ely-​const​ant-​wher​eas-​work​ers-​power-​has-​been-​ ero​ded-​by-​pol​icy-​acti​ons/​; Evan Starr, J. J. Prescott, and Norman Bishara, “Noncompetes in the U.S. Labor Force,” University of Michigan Law and Economics Research Paper no. 18-​ 013, April 12, 2019; Suresh Naidu, Eric Posner, and Glen Weyl, “More and More Companies Have Monopoly Power over Workers’ Wages. That’s Killing the Economy,” Vox, April 6, 2018, https://​w ww.vox.com/​the-​big-​idea/​2018/​4/​6/​17204​808/​wages-​employ​ers-​work​ers-​ monops​ony-​gro​wth-​sta​gnat​ion-​ine​qual​ity. 75. Jane Flanagan, “It’s Not Just Noncompetes—​Increased Use of Anti-​competitive Contracts Has Limited Workers’ Bargaining Power and Employers’ Hiring Power,” EPI Blog, August 28, 2019, https://​www.epi.org/​blog/​its-​not-​just-​nonc​ompe​tes-​increa​sed-​use-​of-​anti-​comp​etit​ ive-​contra​cts-​has-​limi​ted-​work​ers-​bar​gain​ing-​power-​and-​employ​ers-​hir​ing-​power/​. 76. Bronfenbrenner, “No Holds Barred”; Annette Bernhardt et al., “Broken Laws, Unprotected Workers: Violations of Employment and Labor Laws in America’s Cities,” National Employment Law Project, 2009, http://​www.nelp.org/​cont​ent/​uplo​ads/​2015/​03/​Broke​ nLaw​sRep​ort2​009.pdf. 77. Bronfenbrenner, “No Holds Barred,” 8–​11. 78. Richard B. Freeman, “In Search of Union Wage Concessions in Standard Data Sets,” Industrial Relations 25, no. 2 (Spring 1986): 131–​145, https://​doi.org/​10.1111/​j.1468-​232X.1986. tb00​676.x; Audrey Freedman, “A Fundamental Change in Wage Bargaining,” Challenge 25, no. 3 ( July–​August 1982): 14–​17, https://​doi.org/​10.1080/​05775​132.1982.11470​775. 79. Freedman, “Fundamental Change.” 80. Freeman and Medoff, What Do Unions Do?, 22. 81. Simcha Barkai and Seth G. Benzell, “70 Years of Corporate Profits,” Stigler Center for the Study of the Economy and the State,” New Working Paper Series no. 22, April 2018. 82. BLS, Economic News Release, “Median Weekly Earnings of Full-​Time Wage and Salary Workers by Union Affiliation and Selected Characteristics,” https://​www.bls.gov/​news.rele​ ase/​uni​on2 . t 0 2 .htm. 83. Nolan McCarty, Keith T. Poole, and Howard Rosenthal, Polarized America: The Dance of Ideology and Unequal Riches, 2nd ed. (Cambridge, MA: MIT Press, 2016); Hacker and Pierson, Winner-​Take-​All Politics; Bartels, Unequal Democracy. 84. Economic Policy Institute, https://​www.epi.org/​mini​mum-​wage-​trac​ker/​. 85. Canada offers a useful comparison on this point. Canada gives the provinces and territories primary responsibility for setting minimum wage levels. All of them have set minimum wages higher than the federal level, which, as in the United States, has lagged behind inflation. However, in all 10 provinces and three territories, real minimum wages have increased in value since the 1990s (based on my calculations from Canadian federal and provincial statistics). 86. BLS Reports, “Characteristics of Minimum Wage Workers, 2019,” BLS Reports, Report no. 1085, April 2020. 87. Federal Register, Annual Update of the HHS Poverty Guidelines https://​www.fede​ralr​ egis​ter.gov/​docume​nts/​2020/​01/​17/​2020-​00858/​ann​ual-​upd​ate-​of-​the-​hhs-​pove​rty-​gui​ deli​nes. 88. David H. Autor, Alan Manning, and Christopher L. Smith, “The Contribution of the Minimum Wage to US Wage Inequality over Three Decades: A Reassessment,” American Economic Journal: Applied Economics 8, no. 1 (2016): 58–​99, https://​doi.org/​10.1257/​ app.20140​073. 89. David E. Bloom and Richard B. Freeman, “The Fall in Private Pension Coverage in the United States,” American Economic Review 82, no. 2 (May 1992): 539. 90. Bloom and Freeman, “Fall in Private Pension Coverage,” 544.

 

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91. Some political scientists call this process “layering,” since it creates new layers of market-​ based mechanisms letting the better-​off insure themselves against risk of directly repealing Social Security and other federal social insurance programs. Politically, it provides cover for a policy allowing public social protection to lose value over time.   Cf. Jacob S. Hacker, Paul Pierson, and Kathleen Thelen, “Drift and Conversion: Hidden Faces of Institutional Change,” in Advances in Historical-​Comparative Analysis, ed. James Mahoney and Kathleen Thelen (New York: Cambridge University Press, 2015), 180–​208. 92. Hacker, “Privatizing Risk”; Hacker, Off-​Center. 93. Jacob S. Hacker, “The Historical Logic of National Health Insurance: Structure and Sequence in the Development of British, Canadian, and U.S. Medical Policy,” Studies in American Political Development 12 (Spring 1998): 57–​130, https://​doi.org/​10.1017/​S08985​88X9​ 8001​308; Bloom and Freeman, “Fall in Private Pension Coverage”; Jon R. Gabel, “Job-​Based Health Insurance, 1977–​1998: The Accidental System under Scrutiny,” Health Affairs 18, no. 6 (December 1999): 62–​74, https://​doi.org/​10.1377/​hlth​aff.18.6.62. 94. Hacker, “Privatizing Risk”; Gabel, “Job-​Based Health Insurance,” 63. 95. Bloom and Freeman, “Fall in Private Pension Coverage,” 544. 96. Gabel, “Job-​Based Health Insurance,” 68. 97. US GAO, letter to Senator Bernard Sanders, March 26, 2019, https://​www.gao.gov/​ass​ets/​ gao-​19-​442r.pdf 98. A recent paper detailing the estimates of wealth distribution if such projected future retirement income were to be treated as part of household assets is Lindsay Jacobs, Elizabeth Llanes, Kevin Moore, Jeffrey Thompson, and Alice Henriques Volz, “Wealth Concentration in the United States Using an Expanded Measure of Net Worth,” Federal Reserve Bank of Boston Working Papers 21-​6, August 2, 2021. However, these modeling exercises shed little light on actual wealth inequality in the United States. The fact that nearly 30% of older households lack any retirement assets is undeniable. 99. David Weil, The Fissured Workplace: Why Work Became So Bad for So Many and What Can Be Done to Improve It (Cambridge, MA: Harvard University Press, 2014).. 100. Weil, The Fissured Workplace, 271. 101. Rick Wartzman, The End of Loyalty: The Rise and Fall of Good Jobs in America (New York: Public Affairs, 2017); Weil, The Fissured Workplace. 102. Tom Brant, “Uber to European Court: We’re Not a Transportation Company,” PC Magazine, November 29, 2016, https://​www.pcmag.com/​news/​uber-​to-​europ​ean-​court-​were-​not-​a-​ tra​nspo​rtat​ion-​comp​any; Joel Rosenblatt, “Uber’s Future May Depend on Convincing the World Drivers Aren’t Part of Its ‘Core Business,’” Time, September 12, 2019, https://​time. com/​5675​637/​uber-​busin​ess-​fut​ure/​. 103. Note that quit and hire rates fell considerably in 2022. These figures are regularly reported by the Labor Department’s Bureau of Labor Statistics. See BLS, Economic News Release, Job Openings and Labor Turnover, various years https://​www.bls.gov/​news.rele​ase/​jolts. t02.htm. 104. Josh Bivens, Lawrence Mishel, and John Schmitt, “It’s Not Just Monopoly and Monopsony: How Market Power Has Affected American Wages,” Economic Policy Institute, April 25, 2018; Bronfenbrenner, “No Holds Barred”; Bernhardt et al., “Broken Laws, Unprotected Workers”; Freeman and Medoff, What Do Unions Do?; Bivens and Shierholz, “Labor Market Changes”; Starr, Prescott, and Bishara, “Noncompetes”; Naidu, Posner, and Weyl, “More and More Companies”; Alan B. Krueger, “The Rigged Labor Market,” Milken Institute, April 28, 2017, https://​www.milke​nrev​iew.org/​artic​les/​the-​rig​ged-​labor-​mar​ket. 105. Tim Xu, “Markups on Emergency Medicine and Anesthesiology Services in the United States from 2012 to 2016,” JAMA Internal Medicine 180, no. 2 (2020): 327–​329, https://​ doi.org/​10.1001/​jamain​tern​med.2019.5141; Tim Xu, Angela Park, Ge Bai, et al., “Variation in Emergency Department vs Internal Medicine Excess Charges in the United States,” JAMA Internal Medicine 177, no. 8 (2017): 1139–​1145, https://​doi.org/​10.1001/​ jamain​tern​med.2017.1598; Tim Xu, Albert W. Wu, and Martin A. Makary, “The Potential Hazards of Hospital Consolidation: Implications for Quality, Access, and Price,” JAMA 314, no. 1 (2015): 1337–​1338, https://​doi.org/​10.1001/​jama.2015.7492; GAO, “Air Ambulance: Available Data Show Privately-​Insured Patients Are at Financial Risk,” March 2019; Marty Makary, The Price We Pay: What Broke American Health Care—​and How to Fix

 



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It (New York: Bloomsbury, 2019); Atul Gupta, Sabrina T. Howell, Constantine Yannelis, et al., “Does Private Equity Investment in Healthcare Benefit Patients? Evidence from Nursing Homes,” NBER Working Paper 28474, February 2021, https://​doi.org/​10.3386/​ w28​474; GAO, “Air Ambulance: Data Collection and Transparency Needed to Enhance DOT Oversight,” GAO-​17-​637, 2017; Lev Facher, “Amid Coronavirus, Private Equity-​ Backed Company Slashes Benefits for Emergency Room Doctors,” Statnews, April 1, 2020. https://​www.statn​ews.com/​2020/​04/​01/​slas​hes-​benef​i ts-​for-​doct​ors-​coro​navi​rus/​. 106. Andrew B. Bindman, “Rising Prices and Health Care ‘Empires,’” JAMA 323, no. 9 (March 3, 2020): 815–​816, https://​doi.org/​10.1001/​jama.2020.1370. 107. GAO, “Air Ambulance: Data Collection.” 108. The rule was adopted under President Reagan in 1984 and amended in 1994. Federal Trade Commission, “Complying with the Funeral Rule,” (April 2019). https://​www.ftc.gov/​ sys​tem/​files/​docume​nts/​plain-​langu​age/​565a-​comply ​ing-​w ith-​f une​ral-​r ule​_​202​0_​ma​ rch_​508.pdf. 109. Eileen Appelbaum and Rosemary Batt, “What Wall Street Doesn’t Want You to Know about Hospital Emergency Rooms,” Salon, April 9, 2020, https://​www.salon.com/​2020/​04/​09/​ what-​wall-​str​eet-​doe​snt-​want-​you-​to-​know-​about-​hospi​tal-​emerge​ncy-​rooms_​part​ner/​. 110. Gretchen Morgenson and Emmanuelle Saliba, “Private Equity Firms Now Control Many Hospitals, ERs and Nursing Homes. Is It Good for Health Care?,” NBC News, May 13, 2020, https://​www.nbcn​ews.com/​hea​lth/​hea​lth-​care/​priv​ate-​equ​ity-​firms-​now-​cont​rol-​many-​ hospit​als-​ers-​nurs​ing-​homes-​n1203​161. 111. Zack Cooper, Fiona Scott Morton, and Nathan Shekita, “Surprise! Out-​of-​Network Billing for Emergency Care in the United States,” NBER Working Paper 23623, January 2018, 4, https://​doi.org/​10.1086/​708​819. 112. Cooper, Morton, and Shekita, “Surprise.” 113. Cooper, Morton, and Shekita, “Surprise,” 5. 114. Cooper, Morton, and Shekita, “Surprise,” 36. 115. Cooper, Morton, and Shekita, “Surprise,” 4. 116. Xu et al., “Variation in Emergency Department.” 117. Xu, “Markups on Emergency Medicine.” 118. GAO, “Air Ambulance: Data Collection.” 119. Christen Linke Young, Loren Adler, Paul B. Ginsburg, and Mark Hall, “The Relationship between Network Adequacy and Surprise Billing,” USC-​Brookings Schaeffer on Health Policy, May 10, 2019, Brookings Institution, 2019, https://​www.brooki​ngs.edu/​blog/​usc-​ brooki​ngs-​schaef​f er-​on-​hea​lth-​pol​icy/​2019/​05/​10/​the-​relat​ions​hip-​betw​een-​netw​ork-​ adequ​acy-​and-​surpr​ise-​bill​ing/​; “Testimony of Claire McAndrew,” Director of Campaigns and Partnerships, Families, USA, Before the House Energy and Commerce Committee Subcommittee on Health, June 12, 2019, https://​www.fami​lies​usa.org/​resour​ces/​testim​ ony- ​on- ​surpr ​i se-​b ill​ing-​bef​ore-​the-​house-​ene​rgy-​and- ​comme​rce- ​subco​mmit​tee- ​on-​ hea​lth/​ 120. Makary, The Price We Pay. 121. Anne Case and Angus Deaton, Deaths of Despair and the Future of Capitalism (Princeton, NJ: Princeton University Press, 2020), 200; Zack Cooper, Stuart V. Craig, Martin Gaynor, et al., “The Price Ain’t Right? Hospital Prices and Health Spending on the Privately Insured,” Quarterly Journal of Economics 134, no. 1 (2019): 51–​107, https://​doi.org/​10.3386/​ w21​815. 122. Cooper et al., “The Price Ain’t Right.” 123. Bindman, “Rising Prices.” 124. Gupta et al., “Private Equity Investment.” 125. Case and Deaton, Deaths of Despair. 126. Case and Deaton, Deaths of Despair, 124–​125. 127. Case and Deaton, Deaths of Despair, 114. 128. Scott Higham and Lennie Bernstein, “Rep. Tom Marino: Drug Czar Nominee and the Opioid Industry’s Advocate in Congress,” Washington Post, October 15, 2017, https://​www. was​hing​tonp​ost.com/​inv​esti​gati​ons/​rep-​tom-​mar​ino-​drug-​czar-​nomi​nee-​and-​the-​opi​oid-​ indust​r ys-​advoc​ate-​in-​congr​ess/​2017/​10/​15/​55521​1a0-​b03a-​11e7-​9e58-​e62​8854​4af9​8_​ st​ory.html. Congressman Tom Marino (R-​PA) was one of the members actively opposing

 

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the DEA’s efforts to stem the flow of the drugs into areas heavily affected by overdoses. In 2017, President Trump nominated him to oversee national drug policy. When press reports revealed his role in supporting the drug companies against the DEA, he withdrew his name from consideration. Bill Chappell, “Tom Marino, Trump's Pick as Drug Czar, Withdraws after Damaging Opioid Report,” NPR, October 17, 2017, https://​www.npr.org/​secti​ons/​ the​two-​way/​2017/​10/​17/​558276​546/​tom-​mar​ino-​tru​mps-​pick-​as-​drug-​czar-​withdr​aws-​ after-​damag​ing-​opi​oid-​rep​ort. 129. Doni Bloomfield and Aaron S. Kesselheim, “Biden Can Lower Drug Prices without Congress Doing Anything,” Washington Post, January 5, 2021. 130. Listed drug prices rose at a compound average annual growth rate of 7.1% from 2014 through 2019. IQVIA Institute, “Medicine Spending and Affordability in the United States,” August 2020, 2. 131. Michael D. Frakes and Melissa Wasserman, “The Failed Promise of User Fees: Empirical Evidence from the U.S. Patent and Trademark Office,” Journal of Empirical Legal Studies 11, no. 4 (2014): 602–​636, https://​doi.org/​10.1111/​jels.12051. 132. Michael D. Frakes and Melissa D. Wasserman, “Does the U.S. Patent and Trademark Office Grant Too Many Bad Patents? Evidence from a Quasi-​Experiment,” Stanford Law Review 67, no. 3 (2015): 613–​676. 133. Morgenson and Saliba, “Private Equity Firms.” 134. Irena Papanicolas, Liana R. Woskie, and Ashish K. Jha, “Health Care Spending in the United States and Other High-​Income Countries,” JAMA 319, no. 1 (2018): 1027, https://​doi.org/​ 10.1001/​jama.2018.1150. 135. Anne Case and Angus Deaton, “America Can Afford a World-​Class Health System. Why Don’t We Have One?,” New York Times, April 14, 2020. 136. Dave Barkholz, “TeamHealth Picks LifePoint Health Exec Leif Murphy as New CEO,” Modern Healthcare, September 6, 2016, https://​www.moder​nhea​lthc​are.com/​arti​cle/​ 20160​906/​NEWS/​160909​952/​tea​mhea​lth-​picks-​lifepo​int-​hea​lth-​exec-​leif-​mur​phy-​as-​ new- ​ceo#:~:text=​Tea​mHea​lth%20has%20na​med%20as%20its,sign​ing%20bo​nus%20 of%20%242.8%20mill​ion.. 137. Joshua Franklin, “Blackstone CEO Schwarzman Pockets at Least $568 Million in 2018: Filing,” Reuters, March 1, 2019, https://​www.reut​ers.com/​arti​cle/​us-​bla​ckst​one-​ group-​compe​nsat​ion/​bla​ckst​one-​ceo-​sch​warz​man-​pock​ets-​at-​least-​568-​mill​ion-​in-​2018-​ fil​ing-​idUSKC​N1QI​5P2#:~:text=​NEW%20Y​ORK%20(Reut​ers)%20%2D%20Bla​ckst​ one,reg​ulat​ory%20fil​ing%20sho​wed%20on%20Fri​day. The CEO of Envision Healthcare received $21,726,391 in total compensation in 2016, of which $19 million was in the form of stock shares. In 2017 his base pay rose slightly but he was awarded less stock, so his total pay fell to $7.2 million. https://​www1.sal​ary.com/​Chri​stop​her-​A-​Hol​den-​Sal​ ary-​Bonus-​Stock-​Opti​ons-​for-​ENVIS​ION-​HEA​LTHC​ARE-​CORP.html#:~:text=​Execut​ ive%20C​ompe​nsat​ion&text=​A s%20Pr​esid​ent%20and%20Ch​ief%20Ex​ecut​ive,made%20 %247%2C323%2C638%20in%20to​tal%20c​ompe​nsat​ion. 138. Anders Melin, “KKR Billionaires Kravis and Roberts Get $203 Million in 2018,” Bloomberg News, February 16, 2019. https://​www.bloomb​erg.com/​news/​artic​les/​2019-​02-​16/​kkr-​ billi​onai​res-​kra​vis-​and-​robe​rts-​get-​203-​mill​ion-​in-​2018. 139. Elizabeth Olmsted Teisberg, Michael E. Porter, and Gregory B. Brown, “Making Competition in Health Care Work,” Harvard Business Review, July–​August 1994, 131–​141. 140. Teisberg, Porter, and Brown, “Making Competition,” 140. 141. Case and Deaton, “America Can Afford.” 142. Brookings Workforce of the Future initiative website: https://​www.brooki​ngs.edu/​prod​ uct/​fut​ure-​of-​the-​workfo​rce-​ini​tiat​ive. 143. Brookings Workforce of the Future initiative website: https://​www.brooki​ngs.edu/​prod​ uct/​fut​ure-​of-​the-​workfo​rce-​ini​tiat​ive. 144. Papanicolas, Woskie, and Jha, “Health Care Spending.” 145. The US rate is 0.8 per 100,000 women, the German rate 0.1. Data from 2017 for deaths per 100,000 women from complications from pregnancy, childbirth, and first six weeks after childbirth. https://​stats.oecd.org/​.

 



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146. E. E. Petersen, N. L. Davis, D. Goodman, et al., “Racial/​Ethnic Disparities in Pregnancy-​ Related Deaths—​United States, 2007–​2016,” Morbidity and Mortality Weekly Report, September 6, 2019, 762–​765, http://​dx.doi.org/​10.15585/​mmwr.mm683​5a3. 147. CDC, Maternal Mortality by State, 2018 https://​www.cdc.gov/​nchs/​mater​nal-​mortal​ity/​ MMR-​2018-​State-​Data-​508.pdf 148. Papanicolas, Woskie, and Jha, “Health Care Spending”; Xu, Wu and Makary, “Potential Hazards”; Xu, “Markups on Emergency Medicine”; Xu et al., “Variation in Emergency Department”; Laura Dwyer-​Lindgren, Amelia Bertozzi-​Villa, Rebecca W. Stubbs, et al., “Inequalities in Life Expectancies among US Counties, 1980 to 2014: Temporal Trends and Key Drivers,” JAMA Internal Medicine 177, no. 7 (2017): 1003–​1011, https://​doi.org/​ 10.1001/​jamain​tern​med.2017.0918; Frederick J. Zimmerman and Nathaniel W. Anderson, “Trends in Health Equity in the United States by Race/​Ethnicity, Sex, and Income, 1993–​ 2017,” JAMA Network Open 2, no. 6 (2019): 1–​10, https://​doi.org/​10.1001/​jama​netw​orko​ pen.2019.6386; Paula A. Braveman, Catherine Cubbin, Susan Egerter, et al., “Socioeconomic Disparities in Health in the United States: What the Patterns Tell Us,” American Journal of Public Health 100 (Supplement) (April 2010): S186–​S196, https://​doi.org/​10.2105/​ AJPH.2009.166​082. 149. David A. Squires, “Explaining the High Health Care Spending in the United States: An International Comparison of Supply, Utilization, Prices and Quality,” Issues in International Health Policy, Commonwealth Fund, May 2012. 150. Joseph L. Dieleman et al., “US Health Care Spending by Race and Ethnicity, 2002–​2016,” JAMA 326, no. 7 (2021): 649–​659, https://​doi.org/​10.1001/​jama.2021.9937. 151. Gabriel Winant, The Next Shift: The Fall of Industry and the Rise of Health Care in Rust Belt America (Cambridge, MA: Harvard University Press, 2021), 6. 152. Winant, Next Shift, 1–​2. As Winant shows, this model of employment is a classic example of workplace “fissuring.” 153. In 2021, the median wage for home health and personal care aides was $14.15 per hour. The 2019 median wage in the general workforce, as of 2019, was $19.33. Elise Gould, State of Working America Wages 2019, Economic Policy Institute, February 20, 2020 https://​www. epi.org/​publ​icat​ion/​swa-​wages-​2019/​; BLS, Occupational Outlook Handbook, Home Health and Personal Care Aides, https://​www.bls.gov/​ooh/​hea​lthc​are/​home-​hea​lth-​aides-​ and-​perso​nal-​care-​aides.htm#:~:text=​%2429%2C430-​,The%20med​ian%20ann​ual%20w​ age%20for%20h​ome%20hea​lth%20and%20p​erso​nal%20c​are,perc​ent%20ear​ned%20m​ ore%20t​han%20%2437%2C010. 154. Case and Deaton, Deaths of Despair, 187.

Chapter 5 1. An accessible treatment of the median voter theorem may be found in Kenneth A. Shepsle, Analyzing Poitics; Rationality, Behavior, and Institutions, 2nd ed. (New York: Norton, 2010). 2. The classic model of the pull toward the middle in two-​party competition is presented in Anthony Downs, An Economic Theory of Democracy (New York: Harper and Row, 1957). 3. Allan H. Meltzer and Scott F. Richard, “A Rational Theory of the Size of Government,” Journal of Political Economy 89, no. 5 (1981): 914–​927, https://​doi.org/​10.1086/​261​013. 4. Data from https://​fred.stl​ouis​fed.org/​. 5. Jacob S. Hacker and Paul Pierson, Off Center: The Republican Revolution and the Erosion of American Democracy (New Haven, CT: Yale University Press, 2005); Nolan McCarty, Keith T. Poole, and Howard Rosenthal, Polarized America: The Dance of Ideology and Unequal Riches, 2nd ed. (Cambridge, MA: MIT Press, 2016); Branko Milanovic, “The Median-​Voter Hypothesis, Income Inequality, and Income Redistribution: An Empirical Test with the Required Data,” European Journal of Political Economy 16 (2000): 367–​410, https://​doi.org/​ 10.1016/​S0176-​2680 (0 0) 00 014-​8. 6. Congressional Budget Office, “Projected Changes in the Distribution of Household Income, 2016–​2021,” December 2019, https://​www.cbo.gov/​publ​icat​ion/​55941; Emmanuel Saez, “Striking It Richer: The Evolution of Top Incomes in the United States” (updated with 2017 final estimates), March 2, 2019; Emmanuel Saez and Gabriel Zucman, The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay (New York: Norton, 2019).

 

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7. Lane Kenworthy and Jonas Pontusson, “Rising Inequality and the Politics of Redistribution in Affluent Countries,” Perspectives on Politics 3, no. 3 (2005): 449–​471, https://​doi.org/​10.1017/​ S15375​9270​5050​292; Noam Lupu and Jonas Pontusson, “The Structure of Inequality and the Politics of Redistribution,” American Political Science Review 105, no. 2 (May 2011): 316–​336, https://​doi.org/​10.1017/​S00030​5541​1000​128; Herwig Immervoll and Linda Richardson, “Redistribution Policy and Inequality Reduction in OECD Countries: What Has Changed in Two Decades?,” OECD Social, Employment and Migration Working Papers no. 122, 2011. 8. See the discussion in Jan-​Werner Müller, Democracy Rules (New York: Farrar, Straus and Giroux, 2021). 9. Robert A. Dahl, On Political Equality (New Haven, CT: 2006); Stephen Ansolabehere and James M. Snyder, The End of Inequality: One Person, One Vote and the Transformation of American Politics (New York: Norton, 2008). 10. Eric Foner, The Second Founding: How the Civil War and Reconstruction Remade the Constitution (New York: Norton, 2019). 11. For example, Donald Trump’s adviser Steve Bannon once suggested restoring a property qualification to the right to vote. Scott Shane, “Combative, Populist Steve Bannon Found His Man in Donald Trump,” New York Times, November 27, 2016 https://​www.nyti​mes.com/​ 2016/​11/​27/​us/​polit​ics/​steve-​ban​non-​white-​house.html?_​r=​. 12. Kevin D. Williamson, “Why Not Fewer Voters?,” National Review, April 6, 2021. 13. N. Lenin, “Luchshe Men’she, Da Luchshe,” Pravda, March 4, 1923. This essay, one of the last Lenin wrote, argued that the Worker-​Peasant Inspectorate must concentrate on recruiting better-​qualified staff. He recommended studying German models for recruitment and training. On the Bolshevik view of institutions of mass political participation as useful “schools” for educating voters without allowing them actual political rights, see Thomas F. Remington, Building Socialism in Bolshevik Russia (Pittsburgh, PA, University of Pittsburgh Press, 1984). Williamson may also have been alluding to the memorable line spoken by Greta Garbo in the 1939 film Ninotchka, where, playing a dour Soviet political commissar, she reports that the results of the latest purges in Russia were satisfactory: “There will be fewer but better Russians.” 14. Kay L. Schlozman, Henry Brady, and Sidney Verba, Unequal and Unrepresented: Political Inequality and the People’s Voice in the New Gilded Age (Princeton, NJ: Princeton University Press, 2018). 15. Daron Acemoglu and James Robinson, Economic Origins of Dictatorship and Democracy (New York: Cambridge University Press, 2006); Carles Boix, Democracy and Redistribution (New York: Cambridge University Press, 2003). 16. Adam Przeworski, Democracy and the Market: Political and Economic Reforms in Eastern Europe and Latin America (New York: Cambridge University Press, 1991). 17. Joel Hellman, “Winners Take All: The Politics of Partial Reform in Postcommunist Transitions,” World Politics 50, no. 1 (1998): 203–​234, https://​doi.org/​10.1017/​S00438​ 8710​0008​091; Timothy J. Frye, “The Perils of Polarization: Economic Performance in the Postcommunist World,” World Politics 54, no. 3 (2002): 308–​337, https://​doi.org/​10.1353/​ wp.2002.0008. 18. Timothy Frye, “Capture or Exchange? Business Lobbying in Russia,” Europe-​Asia Studies 54, no. 7 (2002): 1017–​1036, https://​doi.org/​10.1080/​0966​8130​2200​0017​113. 19. Broadly speaking we can distinguish three general categories of relations between economic and political elites. Under “capture,” business dominates government and exercises significant policy influence, capturing the lion’s share of rents. Under “control,” state elites dominate business and appropriate economic rents. “Collusion” refers to a relationship in which each side has distinct interests, and they share rents in order for mutual benefit, but at society’s expense. See Joel S. Hellman, Geraint Jones, and Daniel Kaufmann, “‘Seize the State, Seize the Day’: State Capture, Corruption, and Influence in Transition,” World Bank Institute Policy Research Working Paper no. 2444, September 2000, https://​doi.org/​10.1596/​ 1813-​9450-​2444. 20. David Szakonyi and Johannes Urpelainen, “Who Benefits from Economic Reform? Firms and Distributive Politics,” Journal of Politics 76, no. 3 ( July 2014): 841–​858, https://​doi.org/​ 10.1017/​S00223​8161​4000​061.

 



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21. Unemployment reached nearly 11% by the end of 1982. Richard C. Auxier, “Reagan’s Recession,” December 14, 2010, Pew Research Center, https://​www.pewr​esea​rch.org/​2010/​ 12/​14/​reag​ans-​recess​ion/​. 22. Minxin Pei, China’s Trapped Transition (Cambridge, MA: Harvard University Press, 2008), 31. 23. Cf Tim Wu, The Curse of Bigness: Antitrust in the New Gilded Age (New York: Columbia Global Reports, 2016). Brandeis in particular was acutely sensitive to the fact that the concentration of economic power represented by the giant trusts in the American economy was equivalent to the state administrative power aspired to by Marxists, and equally inimical to individual freedom. In a 1905 address to the Commercial Club in Boston, Brandeis indicted the managers of the oligopolistic insurance companies not only for their “exorbitant salaries and commissions” but also for “deliberate and persistent deception of the public.” He observed that they spent hundreds of thousands of dollars “for legislative purposes” but buried the spending in real estate accounts. Generalizing, Brandeis noted the admiration that radical socialists expressed for the titans of American industry: “Socialistic thinkers may smile approvingly at the operations of Morgan, Perkins and Rockefeller, and of the Hydes, McCalls, and McCurdys. They see approaching the glad day when monopoly shall have brought all industry and finance under a single head, so that with the cutting of a single neck, as Nero vainly wished for his Christian subjects, destruction of the enemy may be accomplished.” As Brandeis recognized, socialists such as Lenin, Bukharin, and Eugene V. Debs all saw in the great trusts advanced forms of economic planning that the socialist state would take over and run, thereby eliminating the ruinous market competition that led to economic crises and crashes. Louis D. Brandeis (counsel for the protective committee of policy-​holders in the Equitable Life Assurance Society), “Life Insurance: The Abuses and the Remedies,” an address delivered before the Commercial Club of Boston, 1905, published by the Policy-​ Holders Protective Committee, at 8, 10, and 27.   In a 1913 essay, Brandeis argued argued that it was government’s responsibility to protect and regulate competition. “No trader,” he wrote, “should be allowed to kill competition.” Even if, in some cases, a private monopoly achieved efficiency gains, these tended to be retained as profits rather than returned to society in the form of lower prices. Moreover, often monopolies were not more efficient, but rather exercised their power to strangle competitors and harm the public. He noted that the reason government had tended not to check the power of monopolies was because “we had a sneaking feeling that perhaps, after all, a private monopoly might be a good thing.” Louis D. Brandeis, “Competition,” American Legal News 24, no. 1 (1913): 1–​14.   Brandeis emphasized the close relationship between wealth and power: “Power begets wealth; and added wealth opens ever new opportunities for the acquisition of wealth and power.” Louis D. Brandeis, Other People’s Money and How the Bankers Use It (New York: Frederick A. Stokes, 1914), http://​lou​isvi​lle.edu/​law/​libr​ary/​spec​ial-​coll​ecti​ons/​the-​louis-​d.-​brand​ eis-​col​lect​ion/​other-​peop​les-​money-​by-​louis-​d.-​brand​eis. 24. Brandeis, Other People’s Money, 23. 25. Quoted in Zephyr Teachout, Corruption in America: From Benjamin Franklin’s Snuff Box to Citizens United (Cambridge, MA: Harvard University Press, 2014), 194. 26. Brown Shoe, Co., Appellant, v. United States, 370 U.S. 294, Cornell Law School, Legal Information Institute https://​www.law.corn​ell.edu/​supre​meco​urt/​text/​370/​294. 27. Fritz Kestner, Der Organisationszwang: Eine Untersuchung über die Kämpfe zwischen Kartellen und Außenseitern (Berlin: Carl Heymanns Verlag, 1912). 28. See the discussion of ordoliberalism in Chapter 9. 29. As Jonathan Baker puts it, an alliance of the center with the Right replaced the former coalition of the Left with the center in shaping regulation of business. Jonathan B. Baker, The Antitrust Paradigm: Restoring a Competitive Economy (Cambridge, MA: Harvard University Press, 2019). 30. Thomas Byrne Edsall, The New Politics of Inequality (New York: Norton, 1984); Jacob S. Hacker and Paul Pierson, Winner-​Take-​All Politics (New York: Simon & Schuster, 2010). 31. Quoted in Hacker and Pierson, Winner-​Take-​All Politics, 117. 32. Adam Winkler, We the Corporations: How American Businesses Won Their Civil Rights (New York: Liveright, 2018), 300–​301.

 

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33. Gallup figures. See https://​news.gal​lup.com/​poll/​11887/​ron​ald-​rea​gan-​from-​peop​les-​pers​ pect​ive-​gal​lup-​poll-​rev​iew.aspx. 34. Data from Pew Research Center and Gallup. 35. William A. Niskanen, “Economic Deregulation in the United States: Lessons for America, Lessons for China,” Cato Journal 8, no. 3 (Winter 1989): 658. 36. John Aldrich, Why Parties? The Origin and Transformation of Political Parties in America (Chicago: University of Chicago Press, 1995); Gary Cox, Making Votes Count: Strategic Coordination in the World’s Electoral Systems (Cambridge: Cambridge University Press, 1997). 37. The historian Heather Cox Richardson argues that since the mid-​1960s, the Republican Party has alternated between brief phases in which it sought to expand equality of economic opportunity followed by longer phases in which its primary goal was to defend private property and the interests of the wealthy. Heather Cox Richardson, To Make Men Free: A History of the Republican Party (New York: Basic Books, 2014); see also Geoffrey Kabaservice, Rule and Ruin: The Downfall of Moderation and the Destruction of the Republican Party, from Eisenhower to the Tea Party (New York: Oxford University Press, 2012). 38. Jacob S. Hacker and Paul Pierson, Let Them Eat Tweets: How the Right Rules in an Age of Extreme Inequality (New York: Liveright, 2020). 39. In the 1950s, sociologist C. Wright Mills wrote of a “power elite” that ran America. Later in this chapter I will discuss these theories. 40. Hacker and Pierson, Off Center; Theda Skocpol and Alexander Hertel-​Fernandez, “The Koch Network and Republican Party Extremism,” Perspectives on Politics, September 2016, 681–​699, https://​doi.org/​10.1017/​S15375​9271​6001​122; Alex Hertel-​ Fernandez, State Capture: How Conservative Activists, Big Businesses, and Wealthy Donors Reshaped the American States—​and the Nation (New York: Oxford University Press, 2019). 41. These have been extensively described by political scientists. See, for example, Hacker and Pierson, Winner-​Take-​All Politics; Hacker and Pierson, Let Them Eat Tweets; Hertel-​Fernandez, State Capture; Christopher H. Achen and Larry M. Bartels, Democracy for Realists: Why Elections Do Not Produce Responsive Government (Princeton, NJ: Princeton University Press, 2016); Larry M. Bartels, Unequal Democracy: The Political Economy of the New Gilded Age (Princeton, NJ: Princeton University Press, 2008); Hacker and Pierson, Winner-​Take-​All Politics; Schlozman, Brady, and Verba, Unequal and Unrepresented; Benjamin I. Page and Martin Gilens, Democracy in America? What Has Gone Wrong and What We Can Do about It (Chicago: University of Chicago Press, 2018); McCarty, Poole, and Rosenthal, Polarized America. 42. Jacob Hacker and Paul Pierson call this effort “the politics of “organized combat.” Hacker and Pierson, Winner-​Take-​All Politics. 43. Winkler, We the Corporations, 302–​322. 44. Skocpol and Hertel-​Fernandez, “Koch Network.” 45. Hertel-​Fernandez, State Capture. 46. Hertel-​Fernandez, State Capture, 24. 47. Jane Mayer, Dark Money: The Hidden History of the Billionaires behind the Rise of the Radical Right (New York: Doubleday, 2016); also see Hertel-​Fernandez, State Capture; and Skocpol and Hertel-​Fernandez, “Koch Network.” 48. Skocpol and Hertel-​Fernandez, “Koch Network.” 49. Joint statement concerning the January 6 attempt to overturn the results of the election by Reps. Thomas Massie (R-​KY), Kelly Armstrong (R-​ND), Ken Buck (R-​CO), Mike Gallagher (R-​WI) Nancy Mace (R-​SC), Tom McClintock (R-​CA), and Chip Roy (R-​TX), https://​mas​ sie.house.gov/​news/​email/​show.aspx?ID=​Z5M​PA3C​VK5F​YZQ3​KBYQ​IDSA​WB4. 50. Quoted in Alexander Keyssar, Why Do We Still Have the Electoral College? (Cambridge, MA: Harvard University Press, 2020), 373. In floor debate in March 1816, Barbour defined that “population anomalous” of the southern states as “having the double property of person and property.” For that reason, the danger of direct election of the president would threaten “the liberties of the people”—​meaning slavery. https://​mem​ory.loc.gov/​cgi-​bin/​amp​age?col​ lId=​llac&fileN​ame=​029/​llac​029.db&rec​Num=​110. 51. Frances E. Lee and Bruce I. Oppenheimer, Sizing Up the Senate: The Unequal Consequences of Equal Representation (Chicago: University of Chicago Press, 1999).

 



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52. Lee and Oppenheimer, Sizing Up the Senate, 124. 53. A recent example is the Senate’s refusal to consider the nomination of President Obama’s candidate for the Supreme Court over a period nine months in 2016 and its eagerness to do so in September 2020 following Justice Ruth Bader Ginsburg’s death. Public opinion surveys showed that 62% of the American public believed that the Senate should not consider a replacement for her seat until a new president had been inaugurated in January 2021. https://​www.reut​ers.com/​arti​cle/​us-​usa-​court-​ginsb​urg-​poll-​idUSKC​N26B​0TN. The Senate Republicans of course had refused to consider Obama’s nominee in 2016 on the same grounds. 54. Philip Bump, “Since 1994, the GOP Is Getting a Lot More Bang (House Seats) for Its Buck (Votes),” Washington Post, March 26, 2021. 55. Seth Moskowitz, “The House’s Republican Bias: Does It Exist?,” Sabato’s Crystal Ball, September 12, 2019, https://​center​forp​olit​ics.org/​crys​talb​all/​artic​les/​the-​hou​ses-​rep​ubli​ can-​bias-​does-​it-​exist/​. 56. Kevin A. Hill, “Does the Creation of Majority Black Districts Aid Republicans? An Analysis of the 1992 Congressional Elections in Eight Southern States,” Journal of Politics 57, no. 2 (1995): 384–​401, https://​doi.org/​10.2307/​2960​312. 57. For example, in Wisconsin in 2018, Republicans captured 64% of the seats in the state legislature with 45% of the votes. 58. https://​www.vox.com/​22961​590/​redist​rict​ing-​ger​r yma​nder​ing-​house-​2022-​midte​rms. 59. Alan I. Abramowitz, The Great Alignment: Race, Party Transformation, and the Rise of Donald Trump (New Haven, CT: Yale University Press, 2018). 60. Alan I. Abramowitz, Brad Alexander, and Matthew Gunning, “Incumbency, Redistricting, and the Decline of Competition in U.S. House Elections,” Journal of Politics 68, no. 1 (2006): 75–​ 88, https://​doi.org/​10.1111/​j.1468-​2508.2006.00371.x. 61. Ansolabehere and Snyder, The End of Inequality. 62. Ansolabehere and Snyder, The End of Inequality, 31. 63. https://​w ww.npr.org/​secti​ons/​the​t wo-​way/​2012/​09/​18/​161333​783/​romn​eys-​w rong-​ and-​right-​about-​the-​47-​perc​ent. 64. Quoted in Hertel-​Fernandez, State Capture, 36. 65. Aaron Blake, “Republicans Keep Admitting That Voter ID Helps Them Win, for Some Reason,” Washington Post, April 7, 2016, https://​www.was​hing​tonp​ost.com/​news/​the-​fix/​ wp/​2016/​04/​07/​repu​blic​ans-​sho​uld-​rea​lly-​stop-​admitt​ing-​that-​voter-​id-​helps-​them-​w in/​ ; Michael Wines, “Some Republicans Acknowledge Leveraging Voter ID Laws for Political Gain,” New York Times, September 16, 2016, https://​www.nyti​mes.com/​2016/​09/​17/​us/​ some-​repu​blic​ans-​ackn​owle​dge-​lev​erag​ing-​voter-​id-​laws-​for-​politi​cal-​gain.html. 66. Michael Wines, “Freed by Court Ruling, Republicans Step Up Effort to Patrol Voting,” New York Times, May 18, 2020, https://​www.nyti​mes.com/​2020/​05/​18/​us/​Vot​ing-​repu​ blic​ans-​trump.html; Perry Bacon Jr., “The Latest on Republican Efforts to Make It Harder to Vote,” FiveThirtyEight, September 9, 2020, https://​five​thir​tyei​ght.com/​featu​res/​the-​lat​ est-​on-​rep​ubli​can-​effo​rts-​to-​make-​it-​har​der-​to-​vote/​; Perry Bacon Jr., “Five Ways Trump and GOP Officials Are Undermining the Election Process,” August 11, 2020, https://​five​ thir​tyei​ght.com/​featu​res/​five-​ways-​trump-​and-​gop-​offici​als-​are-​unde​rmin​ing-​the-​elect​ion-​ proc​ess/​. 67. https://​www.was​hing​tonp​ost.com/​polit​ics/​2020/​03/​30/​trump-​vot​ing-​repu​blic​ans/​. 68. For example, see Jon C. Rogowski and Cathy J. Cohen, “The Racial Impact of Voter Identification Laws in the 2012 Election,” Black Youth Project, 2014, http://​blacky​outh​proj​ ect.com/​wp-​cont​ent/​uplo​ads/​2015/​11/​vote​r_​id​_​aft​er_​2​008.pdf; Zoltan Hajnal, Nazita Lajevardi, and Lindsay Nielson, “Voter Identification Laws and the Suppression of Minority Votes,” University of California, San Diego, 2016; Marcus Anthony Hunter, “How the New Voter ID Laws Impede Disadvantaged Citizens,” SSN Network, September 1, 2012, https://​ schol​ars.org/​contr​ibut​ion/​how-​new-​voter-​id-​laws-​imp​ede-​disadv​anta​ged-​citiz​ens. 69. “DNC v. RNC Consent Decree,” Brennan Center for Justice, November 5, 2016, https://​ www.brenna​ncen​ter.org/​our-​work/​court-​cases/​dnc-​v-​rnc-​cons​ent-​dec​ree. 70. Jane Mayer, “Inside the Koch-​Backed Effort to Block the Largest Election-​Reform Bill in Half a Century,” New Yorker, March 29, 2021.

 

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71. Jacob M. Grumbach, “Laboratories of Democratic Backsliding,” March 28, 2021, https://​ www.icl​oud.com/​iclo​uddr​ive/​0F5EYm​Zu4Y​el_​1​Nlqi​78Te​Vew#grumbach_​laboratorie​s_​of​ _​dem​ocra​tic_​back​slid​ing. 72. “State Voting Laws,” Brennan Center for Justice, https://​www.brenna​ncen​ter.org/​iss​ues/​ens​ ure-​every-​ameri​can-​can-​vote/​vot​ing-​ref​orm/​state-​vot​ing-​laws. 73. Jamelle Bouie, “The G.O.P. Has Some Voters It Likes and Some It Doesn’t,” New York Times, March 30, 2021, https://​www.nyti​mes.com/​2021/​03/​30/​opin​ion/​voter-​supp​ress​ion. html?refe​rrin​gSou​rce=​hig​hlig​htSh​are. 74. From the remarks by Jessica Anderson to a meeting of wealthy donors on April 22, 2021, according to a videotape of the meeting leaked to Mother Jones magazine. Ari Berman and Nick Surgey, “Leaked Video: Dark Money Group Brags about Writing GOP Voter Suppression Bills,” Mother Jones, May 13, 2021, https://​www.moth​erjo​nes.com/​polit​ics/​2021/​05/​herit​ age-​fou​ndat​ion-​dark-​money-​voter-​supp​ress​ion-​laws/​. 75. Lee Atwater, the political adviser to Reagan and both Presidents Bush, laid out the communications strategy for Republican appeals in the South in a 1981 interview, where he observed that using the N-​word was no longer acceptable, so instead Republicans stressed issues such as tax cuts, forced busing, and states rights, in the clear understanding that “a byproduct of them is, blacks get hurt worse than others.” Rick Perlstein, “Exclusive: Lee Atwater’s Infamous 1981 Interview on the Southern Strategy,” The Nation, November 13, 2012. More generally, see Alberto Alesina, Edward Glaeser, and B. S. Sacerdote, “Why Doesn’t the United States Have a European-​Style Welfare State?,” Brookings Papers on Economic Activity 2 (2001): 187–​277, https://​doi.org/​10.1353/​eca.2001.0014; John E. Roemer and Woojin Lee, “Racism and Redistribution in the United States: A Solution to the Problem of American Exceptionalism,” Journal of Public Economics 90 (2006): 1027–​ 1052, https://​doi.org/​ 10.1016/​j.jpub​eco.2005.08.008; Edsall, New Politics of Inequality; Michelle Alexander, The New Jim Crow: Mass Incarceration in the Age of Colorblindness (New York: New Press, 2010). 76. David Hope and Julian Limberg, “The Economic Consequences of Major Tax Cuts for the Rich,” Socio-​economic Review 20, no. 2 (2022): 539–​559, https://​doi.org/​10.1093/​ser/​ mwab​061. 77. Inga Rademacher, “The Entangled State: How State-​Business Relations Shaped the German Corporate Tax Regime,” Competition and Change, January 19, 2021, https://​doi.org/​ 10.1177/​10245​2942​0985​174. 78. Calvin Terbeek, “The Kavanaugh Nomination and Originalism as ‘Counterrevolutionary,’ ” September 26, 2018, https://​ahous​ediv​ided​apd.com/​2018/​09/​26/​the-​kavana​ugh-​nom​inat​ ion-​orig​inal​ism-​as-​count​erre​volu​tion​ary/​; Thomas Edsall, “The Right’s Relentless Supreme Court Justice Picking Machine,” New York Times, October 1, 2020, https://​www.nyti​mes. com/​2020/​10/​01/​opin​ion/​amy-​coney-​barr​ett-​supr​eme-​court.html?refe​rrin​gSou​rce=​artic​ leSh​are. 79. Steven M. Teles, The Rise of the Conservative Legal Movement: The Battle for Control of the Law (Princeton, NJ: Princeton University Press, 2008). 80. Filippo Lancieri, Eric A. Posner, and Luigi Zingales, “The Political Economy of Antitrust Enforcement in the United States,” NBER Working Paper 30326, August 2022, https://​doi. org/​10.3386/​w30​326. 81. Lee Epstein, William M. Landes, and Richard A. Posner, “How Business Fares in the Supreme Court,” Minnesota Law Review 97, no. 4 (2012–​13): 1431–​1473; J. Mitchell Pickerill, “Something Old, Something New, Something Borrowed, Something Blue,” Santa Clara Law Review 49, no. 4 (2009): 1063–​1101. 82. Supreme Court of the United States Syllabus, Janus v. American Federation of State, County, and Municipal Employees, Council 31, et al., Certiorari to the United States Court of Appeals for the Seventh Circuit No. 16-​1466, argued February 26, 2018—​decided June 27, 2018, https://​ www.supre​meco​urt.gov/​opini​ons/​17pdf/​16-​1466_​2​b3j.pdf#page=​56. 83. J. Skelly Wright, “Politics and the Constitution: Is Money Speech?,” Yale Law Journal 85, no. 8 (1976): 1001–​1021. 84. Teachout, Corruption in America, 211. 85. Yasmin Dawood, “Campaign Finance and American Democracy,” Annual Review of Political Science 18 (2015): 333, https://​doi.org/​10.1146/​annu​rev-​poli​sci-​010​814-​104​523.

 



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86. https://​www.supre​meco​urt.gov/​opini​ons/​09pdf/​08-​205.pdf, 43–​ 44, quoting Justice Kennedy in McConnell v. FEC (2002). 87. Dawood, “Campaign Finance,” 339. 88. Teachout, Corruption in America; Winkler, We the Corporations. 89. Richard L. Hasen, Plutocrats United: Campaign Money, the Supreme Sourt, and the Distortion of American Elections (New Haven, CT: Yale University Press, 2016), 5. 90. Hasen, Plutocrats United, 5. 91. Daniel P. Tokaji, “The Obliteration of Equality in American Campaign Finance Law: A Trans-​ border Comparison,” Journal of Parliamentary and Political Law 5 (2011): 382, https://​doi. org/​10.2139/​ssrn.1746​868; Dawood, “Campaign Finance.” Full text at http://​cdn.loc.gov/​ serv​ice/​ll/​usrep/​usrep​494/​usre​p494​652/​usre​p494​652.pdf. 92. Tokaji, “Obliteration of Equality.” 93. Teachout, Corruption in America, 233. 94. Lee Drutman, The Business of America Is Lobbying: How Corporations Became Politicized and Politics Became More Corporate (New York: Oxford University Press, 2015). 95. Drutman, Business of America, 18. 96. Drutman, Business of America, 18. 97. For example, Cooper, Gulen, and Ovtchinnikov studied the efforts by firms to build relations with politicians over the 1979–​2004 period. The most active firm by far was AT&T. In 1984, the year its court-​mandated breakup took effect, it supported 818 candidates for Congress; in the same year, the median firm only contributed to 31. This spending brought substantial benefits to the value of their company stock; a one-​standard-​deviation increase in the number of candidates supported was associated with 2.61% average higher returns than an equivalent portfolio of investments. As Cooper et al. put it, firms treat their contributions to candidates as “positive net present value investments.” Michael J. Cooper, Huseyin Gulen, and V. Ovtchinnikov, “Corporate Political Contributions and Stock Returns,” Journal of Finance 65, no. 2 (April 2010): 707 and 719, https://​doi.org/​10.1111/​j.1540-​6261.2009.01548.x. 98. Examples include efforts by the financial and pharmaceutical industries to block regulation. To cite simply one case: media exposure of the efforts by the pharmaceutical industry to flood poor communities with highly addictive synthetic opioids, leading to a surge of deaths from overdoses, provoked efforts by Congress in 2006 to provide the Drug Enforcement Administration with greater power to enforce restrictions. Intense lobbying by the industry ensured that the bill prevented the DEA from doing so. Representatives from two of the districts that were most affected by opioid abuse were among the leaders in the effort to block regulation.   Anne Case and Angus Deaton, Deaths of Despair and the Future of Capitalism (Princeton, NJ: Princeton University Press, 2020), 124. 99. Drutman, Business of America, 14. 100. Kevin B. Grier, Michael C. Munger, and Brian E. Roberts, “The Determinants of Industry Political Activity, 1978–​1986,” American Political Science Review 88, no. 4 (December 1994): 916, https://​doi.org/​10.2307/​2082​716; Diana Evans, “Oil PACs and Aggressive Contribution Strategies,” Journal of Politics 50, no. 4 (November 1988): 1047–​1056, https://​doi.org/​10.2307/​2131​391. 101. Matthew D. Hill, G. Wayne Kelly, G. Brandon Lockhart, and Robert A. Van Ness, “Determinants and Effects of Corporate Lobbying,” Financial Management, Winter 2013, 931–​957, https://​doi.org/​10.1111/​fima.12032. 102. Christine Mahoney, “Lobbying Success in the United States and the European Union,” Journal of Public Policy 27, no. 1 (2007): 51–​54, https://​doi.org/​10.1017/​S01438​14X0​ 7000​608. 103. Stephen Ansolabehere, John M. de Figueiredo, and James M. Snyder, “Why Is There So Little Money in U.S. Politics?,” Journal of Economic Perspectives 17, no. 1 (2003): 105–​130, https://​doi.org/​10.1257/​089​5330​0332​1164​976. 104. Open Secrets, Cost of Election https://​www.open​secr​ets.org/​overv​iew/​cost.php; Open Secrets, Lobbying Data Summary https://​www.open​secr​ets.org/​lobby/​.

 

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105. Adam Bonica, Nolan McCarty, Keith T. Poole, and Howard Rosenthal, “Why Hasn’t Democracy Slowed Rising Inequality?,” Journal of Economic Perspectives 27, no. 3 (2013): 111, https://​doi.org/​10.1257/​jep.27.3.103. 106. Committee for Economic Development, “The Landscape of Campaign Contributions: Campaign Finance after Citizens United,” July 2017, 2. The report finds, however, that most of the money spent on federal elections continues to come from sources that are subject to legal contribution limits and to public disclosure. In 2015–​16, only 24% of spending came from channels opened up by Citizens United. 107. Center for Responsive Politics, https://​www.open​secr​ets.org/​overv​iew/​blio.php. 108. Center for Responsive Politics, https://​www.open​secr​ets.org/​lobby/​top.php?showY​ear=​ 2018&indexT​ype=​c. 109. Drutman, Business of America, 78–​79. 110. Joseph E. Stiglitz and Mark Pieth, “Overcoming the Shadow Economy,” Friedrich Ebert Stiftung, November 2016, https://​libr​ary.fes.de/​pdf-​files/​iez/​12922.pdf. 111. https://​www.econom​ist.com/​uni​ted-​sta​tes/​2020/​12/​05/​congr​ess-​edges-​clo​ser-​to-​crack​ ing-​down-​on-​anonym​ous-​shell-​corpo​rati​ons; https://​fsi.tax​just​ice.net/​en/​; Rena S. Miller and Liana W. Rosen, “Beneficial Ownership Transparency in Corporate Formation, Shell Companies, Real Estate, and Financial Transactions,” Congressional Research Service, July 8, 2019, R45798. 112. Financial Action Task Force, “United States: Anti-​money Laundering and Counter-​terrorist Financing Measures,” March 2020, http://​www.fatf-​gafi.org/​media/​fatf/​docume​nts/​repo​ rts/​fur/​Fol​low-​Up-​Rep​ort-​Uni​ted-​Sta​tes-​March-​2020.pdf. 113. Carter Dougherty, “Wall Street Breaks with Business Lobby over Corporate Registration Rules,” InsideSources, October 18, 2016, https://​www.inside​sour​ces.com/​wall-​str​eet-​bre​ aks-​busin​ess-​lobby-​corpor​ate-​regis​trat​ion-​rules/​. 114. The Anti-​Money Laundering law passed over President Trump’s veto in January 2021 included a Corporate Transparency Act. Under it, a federal body called the Financial Crimes Enforcement Network would enforce a rule requiring the disclosure of the beneficial owners of corporations. A proposed regulation to this effect was published in December 2021, and the SEC issued a corresponding proposed rule in February 2022, but as of August 2022 neither had been finally adopted. 115. “A Rationale for Continued Deregulation of the Banking Industry,” excerpts from the Economic Report of the President, February 6, 1986, American Banker, February 26, 1986, https://​adva​nce-​lexis-​com.ezp-​prod1.hul.harv​ard.edu/​api/​docum​ent?col​lect​ion=​ news&id=​urn:cont​entI​tem:3S8H-​3SJ0-​000F-​R0H1-​00000-​00&cont​ext=​1516​831. 116. Simon Johnson and James Kwak, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown (New York: Pantheon Books, 2010). 117. Tokaji, “Obliteration of Equality”; Winkler, We the Corporations, 309. 118. Hasen, Plutocrats United, 5. 119. Heather McGhee, The Sum of Us: What Racism Costs Everyone and How We Can Prosper Together (New York: One World, 2021). 120. Judith G. McMullen, “Behind Closed Doors: Should States Regulate Homeschooling,” South Carolina Law Review 75 (2002): 75–​110. 121. National Center for Education Statistics. Between 2000 and 2016, traditional public school, public charter school, and homeschool enrollment increased, while private school enrollment decreased. Traditional public school enrollment increased to 47.3 million (1% increase), charter school enrollment grew to 3.0 million students (from 0.4 million), and the number of homeschooled students nearly doubled to 1.7 million. Private school enrollment fell 4%, to 5.8 million students. https://​nces.ed.gov/​progr​ams/​schoo​lcho​ice/​ ind​_​01.asp#info; Maralee Mayberry, “Home Schooling: Contemporary,” in Education and Sociology: An Encyclopedia, ed. David L. Levinson (New York: RoutledgeFalmer, 2002), 385–​390, https://​nces.ed.gov/​progr​ams/​dig​est/​d17/​tab​les/​dt17_​205.10.asp?refer=​ schoo​lcho​ice. 122. Christopher Cornwell and David B. Mustard, “The Distributional Impacts of Lottery-​ Funded Aid: Evidence from Georgia’s Hope Scholarship,” August 2011. 123. https://​nces.ed.gov/​progr​ams/​dig​est/​d19/​tab​les/​dt19_​216.20.asp.

 



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124. Valerie Strauss, “Why Hedge Funds Love Charter Schools,” Washington Post, June 14, 2014. 125. Justin Miller, “Hedging Education,” American Prospect, May 6, 2016. 126. US Department of Education, School Choice in the United States: 2019, NCES 2019-​106 (Washington, DC: National Center for Education Statistics, 2019), 6. 127. https://​www.ncsl.org/​resea​rch/​educat​ion/​sch​ool-​cho​ice-​scho​lars​hip-​tax-​cred​its.aspx. 128. The Southern Education Foundation, “A New Era of State-​Funded Segregation in Private Schools,” https://​www.southe​rned​ucat​ion.org/​publi​cati​ons/​new​erao​fsta​tefu​nded​segr​ egat​ion/​; Southern Education Foundation, “A Failed Experiment: Georgia’s Tax Credit Scholarships for Private Schools,” https://​www.southe​rned​ucat​ion.org/​publi​cati​ons/​afaile​ dexp​erim​ent/​; Steve Suitts, “Pro & Con: Has Georgia’s Tuition Tax Credit Program Been Successful?,” Atlanta Journal Constitution, July 5, 2011.   The first state to adopt a tuition tax credit program for private schools was Arizona, which simply copied an ALEC template. On ALEC, see Hertel-​Fernandez, State Capture. 129. https://​www.southe​rned​ucat​ion.org/​publi​cati​ons/​new​erao​fsta​tefu​nded​segr​egat​ion/​. 130. https://​www.stl​ouis​fed.org/​on-​the-​econ​omy/​2020/​janu​ary/​ris​ing-​stud​ent-​debt-​great-​recess​ion. 131. http://​pellin​stit​ute.org/​ind​icat​ors/​report​s_​20​20_​d​ata.shtml. 132. In February 2022, the Biden administration stated that DeVry and other educational institutions had made numerous misrepresentations about actual student job placement, and awarded the victims over $400 to enable them to discharge their student loans. https://​ www.ed.gov/​news/​press-​relea​ses/​educat​ion-​dep​artm​ent-​appro​ves-​415-​mill​ion-​borro​wer-​ defe​nse-​cla​ims-​includ​ing-​for​mer-​devry-​uni​vers​ity-​stude​nts. 133. Michael J. Sandel, What Money Can’t Buy: The Moral Limits of Markets (New York: Farrar, Straus and Giroux, 2012). 134. Associated Press et al. v United States, 326 U.S. 1, 28 (1945), https://​supr​eme.jus​tia.com/​ cases/​fede​ral/​us/​326/​1/​. 135. United States v. Associated Press, 52 F. Supp. 362 (S.D.N.Y. 1943), https://​law.jus​tia.com/​ cases/​fede​ral/​distr​ict-​cou​rts/​FSupp/​52/​362/​1755​014/​. 136. Hutchins, president of the University of Chicago, convened a group of 12 distinguished scholars, among whom were Zechariah Chafee Jr., Harold Lasswell, Archibald MacLeish, Charles Merriam, Reinhold Niebuhr, Robert Redfield, and Arthur M. Schlesinger.   Commission on Freedom of the Press, A Free and Responsible Press (Chicago: University of Chicago Press, 1947). 137. This was different from the “equal time” rule for appearances by political candidates, which remains in force. 138. Kathleen Anne Ruane, “Fairness Doctrine: History and Constitutional Issues,” Congressional Research Service, July 13, 2011, https://​fas.org/​sgp/​crs/​misc/​R40​009.pdf; Dylan Matthew, “Everything You Need to Know about the Fairness Doctrine in One Post,” Washington Post, August 23, 2011, https://​www.was​hing​tonp​ost.com/​blogs/​ezra-​klein/​ post/​eve​r yth​ing-​you-​need-​to-​know-​about-​the-​fairn​ess-​doctr​ine-​in-​one-​post/​2011/​08/​ 23/​gIQA​N8CX​ZJ_​b​log.html. 139. Sheelah Kolhatkar, “The Growth of Sinclair’s Conservative Media Empire,” New Yorker, October 15, 2018, https://​www.newyor​ker.com/​magaz​ine/​2018/​10/​22/​the-​gro​wth-​of-​ sincla​irs-​conse​r vat​ive-​media-​emp​ire; Zach Wichter, “Sinclair Videos Renew Debate over Media Ownership,” New York Times, April 2, 2018, https://​www.nyti​mes.com/​2018/​04/​ 02/​busin​ess/​sincl​air-​vid​eos-​renew-​deb​ate-​over-​media-​owners​hip.html. 140. https://​ w ww.refer​ e nce​ f orb​ u sin​ e ss.com/​ h ist​ o ry/​ L o-​ Me/​ MediaN​ e ws-​ G roup-​ Inc. html#:~:text=​ MediaN​ ews%20Gr​ o up%2C%20Inc.%2C%20is,both%20n​ o rth​ ern%20 and%20s​outh​ern%20Cal​ifor​nia. 141. Joe Pompeo, “The Hedge Fund Vampire That Bleeds Newspapers Dry Now Has the Chicago Tribune by the Throat,” Vanity Fair, February 5, 2020; . 142. Jonathan O’Connell, “The Hedge Fund Trying to Buy Gannett Faces Federal Probe after Investing Newspaper Workers’ Pensions in Its Own Funds,” Washington Post, April 17, 2019, https://​www.was​hing​tonp​ost.com/​busin​ess/​econ​omy/​the-​hedge-​fund-​try​ing-​to-​ buy-​gann​ett-​faces-​fede​ral-​invest​igat​ion-​after-​invest​ing-​newspa​per-​work​ers-​pensi​ons-​in-​its-​ own-​funds/​2019/​04/​17/​6283b​f90-​4c15-​11e9-​b79a-​961​983b​7e0c​d_​st​ory.html.

 

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143. A stream of decisions by the FCC, particularly in the Trump administration, has continued to raise the ceiling on the number of news media outlets that any one company may own. Cf Cecilia Kang, Eric Lipton, and Sydney Ember, “How a Conservative TV Giant Is Ridding Itself of Regulation,” New York Times, August 14, 2017, https://​www.nyti​mes.com/​2017/​ 08/​14/​us/​polit​ics/​how-​a-​conse​r vat​ive-​tv-​giant-​is-​ridd​ing-​its​elf-​of-​reg​ulat​ion.html. 144. Theda Skocpol and Vanessa Williamson, The Tea Party and the Remaking of Republican Conservatism (New York: Oxford University Press, 2016). 145. Skocpol and Williamson, Tea Party, 132. 146. Kathleen Hall Jamieson and Joseph N. Cappella, Echo Chamber: Rush Limbaugh and (New York: Oxford University Press, 2008). 147. Eli J. Finkel et al., “Political Sectarianism in America,” Science 370, no. 616 (2020): 533–​536, https://​doi.org/​10.1126/​scie​nce.abe1​715. 148. Nir Grinberg, Kenneth Joseph, Lisa Friedland, et al., “Fake News on Twitter during the 2016 U.S. Presidential Election,” Science 363 ( January 25, 2019): 374–​378, https://​doi. org/​10.1126/​scie​nce.aau2​706. The researchers define fake news sites as those that look like legitimate news sources, but lack the editorial norms and processes that would ensure accuracy. That is, they are defined based on the rules of content production rather than the character of the content itself. 149. NewsMedia Alliance, “How Google Abuses Its Position as a Market Dominant Platform to Strong-​Arm News Publishers and Hurt Journalism,” June 2020; Subcommittee on Antitrust, Commercial and Administrative Law of the Committee on the Judiciary, US House of Representatives, “Investigation of Competition in Digital Markets,” 2020. 150. For example, the outgoing assistant attorney general in the Trump administration in charge of antitrust at the Justice Department noted a “groundswell” of proposals for direct regulation of the digital markets. Makan Delrahim, “ ‘A Whole New World’: An Antitrust Entreaty for a Digital Age,” remarks prepared for delivery at virtual event hosted by Duke University, US Department of Justice, January 19, 2021, https://​www.just​ice.gov/​opa/​spe​ech/​assist​ ant-​attor​ney-​gene​ral-​makan-​delra​him-​deliv​ers-​final-​addr​ess. In fall 2020, the Trump administration charged two big technology companies with abuse of market dominance. In the case against Google, 11 states joined a federal suit (all but two of them with Republican governors). In the case against Facebook, all but four states joined in the action. https://​ www.ftc.gov/​news-​eve​nts/​press-​relea​ses/​2020/​12/​ftc- ​sues-​faceb​ook-​i lle​gal-​mon​opol​ izat​ion.   At the same time, late 2020, the US House of Representatives Subcommittee on Antitrust of the Judiciary Committee—​with a Democratic majority—​issued a lengthy report detailing the case against the four big digital platform companies (Amazon, Google, Facebook, and Apple) on grounds of abuse of market power. Subcommittee on Antitrust, Commercial and Administrative Law of the Committee on the Judiciary, US House of Representatives, Investigation of Competition in Digital Markets (Washington, DC, 2020).   Public opinion about the large digital technology companies, especially on the right, shifted significantly in the Trump period. From 2018, the percent of conservative Republicans who think government should regulate tech companies more than they do now rose from 42% to 53%, whereas Democratic support fell almost by the same amount. https://​www.pewr​ esea​rch.org/​fact-​tank/​2020/​10/​27/​how-​americ​ans-​see-​u-​s-​tech-​compan​ies-​as-​gov​ernm​ ent-​scrut​iny-​increa​ses/​. 151. Paul Starr, “An Unexpected Crisis: The News Media in Postindustrial Democracies,” International Journal of Press/​Politics 17, no. 2 (2012): 234–​242, https://​doi.org/​10.1177/​ 19401​6121​1434​422; Peter Pomerantsev, Nothing Is True and Everything Is Possible: The Surreal Heart of the New Russia (New York: Public Affairs, 2014). 152. Alexander, The New Jim Crow. 153. Megan Mumford, Daine Whitmore Schanzenbach, and Ryan Nunn, “The Economics of Private Prisons,” Hamilton Project, October 20, 2016, 1. 154. Michelle Alexander cites one study that finds that the entire increase in the incarcerated population in the 1980s and 1990s was due to changes in sentencing policy. Alexander, The New Jim Crow, 117.

 



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155. National Institute of Justice, Work in American Prisons: Joint Ventures with the Private Sector (Washington, DC: US Department of Justice, 1995), 5. 156. National Institute of Justice, Work in American Prisons, 3. 157. Mumford, Schanzenbach, and Nunn, “Economics of Private Prisons,” 2. 158. Kara Gotsch and Vinay Basti, “Capitalizing on Mass Incarceration: U.S. Growth in Private Prisons,” Sentencing Project, August 2, 2018, 5. 159. Mumford, Schanzenbach, and Nunn, “Economics of Private Prisons.” 160. Mumford, Schanzenbach, and Nunn, “Economics of Private Prisons”; Gotsch and Basti, “Capitalizing on Mass Incarceration,” 6. 161. Mumford, Schanzenbach, and Nunn, “Economics of Private Prisons,” 6. 162. Devin Coldewey, “Ameelio Wants to Take on For-​Profit, Prison-​Calling Rackets after Starting with Free Letters to Inmates,” Techcrunch, May 14, 2020, https://​tec​hcru​nch. com/​2020/​05/​14/​amee​lio-​wants-​to-​take-​on-​for-​pro​fit-​pri​son-​call​ing-​rack​ets-​after-​start​ ing-​with-​free-​lett​ers-​to-​inma​tes/​. 163. Devin Coldewey, “FCC Commissioner Mignon Clyburn Talks Privacy, Compromise and Connecting Communities,” Techcrunch, May 4, 2017, https://​tec​hcru​nch.com/​2017/​05/​ 04/​fcc-​commi​ssio​ner-​mig​non-​clyb​urn-​talks-​priv​acy-​com​prom​ise-​and-​con​nect​ing-​comm​ unit​ies/​. 164. Bureau of Justice figures: cpus1718at01.csv. 165. Michael S. Schmidt and Kenneth P. Vogel, “Prospect of Pardons in Final Days Fuels Market to Buy Access to Trump,” New York Times, January 17, 2021. 166. McGhee, The Sum of Us. 167. McGhee, The Sum of Us. 168. Nancy MacLean, Democracy in Chains: The Deep History of the Radical Right’s Stealth Plan for America (New York: Penguin Books, 2017), 62–​68. 169. MacLean, Democracy in Chains, 234. 170. McGhee, The Sum of Us. 171. These rights were granted by the king under the Charter of the Forest, which specified the rights of commoners, just as the Magna Carta stipulated the rights of the nobility. Guy Standing, Plunder of the Commons: A Manifesto for Sharing Public Wealth (London: Pelican, 2019). 172. Karen Dawisha, Putin’s Kleptocracy: Who Owns Russia? (New York: Simon & Schuster, 2014); Anders Aslund, Russia’s Crony Capitalism: The Path from Market Economy to Kleptocracy (New Haven, CT: Yale University Press, 2019); Gulnaz Sharafutdinova, Political Consequences of Crony Capitalism inside Russia (Notre Dame, IN: University of Notre Dame Press, 2010); Natalia Lamberova and Konstantin Sonin, “Economic Transition and the Rise of Alternative Institutions: Political Connections in Putin’s Russia,” Economics of Transition 26 (2018): 615–​648; Minxin Pei, China’s Crony Capitalism: The Dynamics of Regime Decay (Cambridge, MA: Harvard University Press, 2016). 173. Hunter Lewis, Crony Capitalism in America, 2008–​2012 (Edinburg, VA: AC2 Books, 2013); Paul Krugman, “Crony Capitalism, USA.,” New York Times, January 15, 2002; Hacker and Pierson, Let Them Eat Tweets. 174. Paul Manafort was a lobbyist who served from June to August 2016 as Donald Trump’s presidential campaign manager. In August 2018 he stood trial in federal court in the Eastern District of Virginia before Judge T. S. Ellis on charges arising from special counsel Robert Mueller’s investigation of ties between Russia and the Trump campaign. He was convicted on eight counts of tax and bank fraud. 175. https://​theh​ill.com/​reg​ulat​ion/​court-​batt​les/​399​871-​manaf​ort-​trial-​day-​two-​judge-​tells-​ pros​ecut​ors-​to-​stop-​say​ing. 176. https://​w ww.polit​ico.com/​story/​2018/​08/​01/​paul-​manaf​ort-​trial-​testim​ony-​day-​2-​ 756​749. 177. Andrew Travers, “End Times in Aspen,” The Atlantic, August 18, 2022, https://​www.thea​ tlan​tic.com/​ideas/​arch​ive/​2022/​08/​aspen-​times-​newspa​per-​vladis​lav-​doro​nin-​bill​iona​ ire-​laws​uit/​671​180/​. 178. Timothy Noah, “‘Crony Capitalism’ Switches Parties?,” New Republic, September 15, 2011.

 

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179. However, Sarah Palin did briefly object to President-​Elect Trump’s 2016 promise to provide government subsidies to Carrier Air Conditioning so as to keep a plant in Indiana open as a case of crony capitalism. From an op-​ed on the Young Conservatives website, December 2, 2016, cited in Politico, December 2, 2016, https://​www.polit​ico.com/​story/​2016/​12/​ sarah-​palin-​don​ald-​trump-​carr​ier-​deal-​crony-​cap​ital​ism-​232​139. 180. Luigi Zingales, A Capitalism for the People: Recapturing the Lost Genius of American Prosperity (New York: Basic Books, 2014), 71; also see Luigi Zingales, “Towards a Political Theory of the Firm,” Journal of Economic Perspectives 31, no. 3 (2017): 113–​130. 181. C. Wright Mills, The Power Elite (New York: Oxford University Press, 1956). 182. Floyd Hunter, Community Power Structure: A Study of Decision Makers (Chapel Hil: University of North Carolina Press, 1953); Community Power Succession: Atlanta’s Policy Makers Revisited (Chapel Hill: University of North Carolina Press, 1980). Hunter used the term “oligarchy” in the follow-​up book, not in the first. 183. Robert A. Dahl, Who Governs? Democracy and Power in an American City (New Haven, CT: Yale University Press, 1961); Nelson W. Polsby, Community Power and Political Theory: A Further Look at Problems of Evidence and Inference, 2nd ed. (New Haven, CT: Yale University Prss, 1980). 184. Dahl, Who Governs?, 11–​24. 185. From Karl Marx and Friedrich Engels, The Communist Manifesto. 186. Hacker and Pierson, Off Center; Skocpol and Hertel-​Fernandez, “Koch Network”; Hertel-​ Fernandez, State Capture. 187. Nicholas Confessore, “Welcome to the Machine: How the GOP Disciplined K Street and Made Bush Supreme,” Washington Monthly 35, nos. 7–​ 8 ( July–​ August 2003): 30–​37; Barbara Sinclair, Party Wars: Polarization and the Politics of National Policy Making (Norman: University of Oklahoma Press, 2006). 188. For example, the financial and pharmaceutical industries have spent heavily to ensure that Senator Kyrsten Sinema of Arizona supported their interests in the Senate. They succeeded when she forced the removal of the carried interest tax loophole from the “inflation reduction” bill proposed by President Biden. https://​www.pbs.org/​newsh​our/​polit​ics/​sin​ema-​ recei​ved-​nea​rly-​1-​mill​ion-​from-​wall-​str​eet-​while-​kill​ing-​tax-​hike-​on-​invest​ors; https://​ www.polit​ico.com/​news/​2021/​10/​15/​sin​ema-​campa​ign-​money-​pha​rma-​fina​nce-​516​110. 189. An example is the claim by Senator Josh Hawley of Missouti in his recent book that “corporate liberals”—​who represent the collusion of big business and the state—​are “draining prosperity and power away from the great middle of our society and creating, as they do, a new oligarchy.” Cited in Susan Benkelman, “In Josh Hawley’s Book on Big Tech, His Persona Risks Undermining His Arguments,” Washington Post, May 4, 2021. 190. Skocpol and Hertel-​Fernandez, “Koch Network.” 191. Andrew B. Hall, “What Happens When Extremists Win Primaries?,” American Political Science Review 109, no. 1 (2015): 18–​42, https://​doi.org/​10.1017/​S00030​5541​4000​641; Andrew B. Hall and Daniel M. Thompson, “Who Punishes Extremist Nominees? Candidate Ideology and Turning out the Base in US Elections,” American Political Science Review 112, no. 3 (2018): 509–​524, https://​doi.org/​10.1017/​S00030​5541​8000​023; Hacker and Pierson, Off Center. 192. O’Donnell was famous, among other things, for explaining that she had once “dabbled into witchcraft” as a young woman but “had never joined a coven.” Later she felt she needed to explain, “I’m not a witch.” https://​abcn​ews.go.com/​News/​christ​ine-​odonn​ell-​dabb​led-​wit​ chcr​aft/​story?id=​11671​277. Another example of an extremist candidate defeating a conservative incumbent in the primary, then losing later to a centrist candidate in a later general election is Virginia’s Seventh District, which was held by Republican majority leader Eric Cantor until an insurgent named Dave Brat ran against him in the primary race in 2014. Despite Cantor’s considerable incumbency advantages, Brat won on a populist platform, among other things accusing Cantor of having a “crony-​capitalist mentality” oriented to big corporations over small business. Despite attracting little support from corporate PACs, Brat won the Republican nomination with the support of a number of grassroots Tea Party groups. However, in 2018 Brat was defeated by a moderate Democrat. 193. Michael J. Sandel, The Tyranny of Merit: What’s Become of the Common Good? (New York: Farrar, Straus and Giroux, 2020).

 



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194. Yascha Mounk, The People vs. Democracy: Why Our Freedom Is In Danger & How to Save It (Cambridge, MA: Harvard University Press, 2018). 195. Michael E. Porter et al., “A Recovery Squandered: The State of U.S. Competitiveness 2019,” Harvard Business School, 2019. 196. https://​prosp​ect.org/​arti​cle/​devil-​deta​ils-​19. 197. Matt Grossman and David A. Hopkins, Asymmetric Politics: Ideological Republicans and Group Interest Democrats (New York: Oxford University Press, 2016). 198. https://​www.onth​eiss​ues.org/​Celeb/​Dick​_​Che​ney_​Budg​et_​+​_​Econ​omy.htm. 199. Jeffrey Frankel, “Republicans Fight Deficits Only When a Democrat Is President,” Harvard Belfer Center blog, January 28, 2021, https://​www.belfe​rcen​ter.org/​index.php/​publ​icat​ ion/​repu​blic​ans-​fight-​defic​its-​only-​when-​democ​rat-​presid​ent. 200. This explains why the question “But do they really believe the ideology?” is misplaced when applied to an ideological polity, as was the Soviet regime, or Xi Jinping’s regime in China, or the Roman Catholic Church. Ideological conformity in public expression is not a matter of belief in the doctrines; it is a matter of signaling faithfulness to the organization that is the vessel for the ideology and that wields political power over the community. The doctrine can become increasingly incapable of describing the world but still play that critical function in maintaining control over the party and public. At some point, if the divergence between “words” and “deeds” grows too wide, counterideologies gain political strength.   Cf. Thomas F. Remington, The Truth of Authority: Ideology and Communication in the Soviet Union (Pittsburgh, PA: University of Pittsburgh Press, 1988); Thomas F. Remington, “A Socialist Pluralism of Opinions: Glasnost’ and Policy-​Making under Gorbachev,” Russian Review 48 (1989): 271–​304, https://​doi.org/​10.2307/​130​365.

Chapter 6 1. Jesse Eisinger, Jeff Ernsthausen, and Paul Kiel, “The Secret IRS Files: Trove of Never-​Before-​ Seen Records Reveal How the Wealthiest Avoid Income Tax,” ProPublica, June 8, 2021, https://​www.pro​publ​ica.org/​arti​cle/​the-​sec​ret-​irs-​files-​trove-​of-​never-​bef​ore-​seen-​reco​ rds-​rev​eal-​how-​the-​wea​lthi​est-​avoid-​inc​ome-​tax. 2. Salary.com. Lawrence J. Ellison, Executive Compensation. https://​ www1.sal​ ary.com/​ Lawre​nce-​J-​Elli​son- ​Sal​ary-​Bonus- ​Stock-​Opti​ons-​for-​Ora​cle-​Corp.html#:~:text=​As%20C​ hair ​man%20and%20Ch​ief%20Tec​hnol​ogy,from%20ot​her%20ty ​pes%20of%20c​ompe​ nsat​ion. 3. Jason Furman et al., “Unlocking Digital Competition: Report of the Digital Competition Expert Panel,” March 2019; Fiona Scott Morton et al., “Committee for the Study of Digital Platforms, Market Structure and Antitrust Subcommittee: Report,” May 15, 2019; Laura Tyson and Michael Spence, “Exploring the Effects of Technology on Income and Wealth Inequality,” in After Piketty: The Agenda for Economics and Inequality, ed. J. Bradford DeLong and Marshall Steinbaum Heather Boushey (Cambridge, MA: Harvard University Press, 2017), 170–​208. 4. Based on my analysis of data on the billionaires list for 2021 compiled by Forbes. This is a propriety data set purchased from Forbes for purposes of this analysis. 5. Raghuram Rajan, The Third Pillar: How Markets and the State Leave the Community Behind (New York: Penguin Press, 2019); Raghuram Rajan and Luigi Zingales, Saving Capitalism from the Capitalists: How Open Financial Markets Challenge the Establishment and Spread Prosperity to Rich and Poor Alike (Princeton, NJ: Princeton University Press, 2004); Ratna Sahay, Martin Cihák, Papa N’Diaye, et al., “Rethinking Financial Deepening Stability and Growth in Emerging Markets,” IMF Staff Discussion Note SDN/​15/​08, May 2015. 6. James Tobin, “On the Efficiency of the Financial System,” Lloyd’s Bank Review, July 1984, 1–​15; Joseph E. Stiglitz, “Fed Policy, Inequality, & Equality of Opportunity,” Roosevelt Institute, August 27, 2015; Joseph Stiglitz, “How to Restore Equitable and Sustainable Economic Growth in the United States,” American Economic Review 106, no. 5 (2016): 43–​ 47, https://​doi.org/​10.1257/​aer.p20161​006; Joseph E. Stiglitz, “The Origins of Inequality, and Policies to Contain It,” National Tax Journal 68, no. 2 (2015): 425–​448, https://​doi. org/​10.17310/​ntj.2015.2.09.

 

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7. Martin Cihák and Ratna Sahay, “Finance and Inequality,” IMF Staff Discussion SDN/​20/​ 01, January 2020, https://​doi.org/​10.5089/​978151​3526​546.006; Michael Brei, Giovanni Ferri, and Leonardo Gambacort, “Financial Structure and Income Inequality,” Bank for International Settlements, BIS Working Papers no. 756, November 2018. 8. Jan DeLoecker, Jan Eeckhout, and Gabriel Unger, “The Rise of Market Power and the Macroeconomic Implications,” Quarterly Journal of Economics 135, no. 2 (2020): 561–​644, https://​doi.org/​10.1093/​qje/​qjz​041; David Autor, David Dorn, Lawrence F. Katz, et al., “The Fall of the Labor Share and the Rise of Superstar Firms,” NBER Working Paper 23396, May 2017, https://​doi.org/​10.3386/​w23​396; Jae Song, David J. Price, Fatih Guvenen, Nicholas Bloom, and Till von Wachter, “Firming Up Inequality,” NBER Working Paper 21199, May 2015, https://​doi.org/​10.3386/​w21​199; Jason Furman and Peter Orszag, “A Firm-​Level Perspective on the Role of Rents in the Rise in Inequality,” in Martin Guzman, ed., Toward a Just Society: Joseph Stiglitz and Twenty-​First Century Economics (Columbia University Press, 2018), 19–​47; James Traina, “Is Aggregate Market Power Increasing? Production Trends Using Financial Statements,” February 8, 2018, http://​dx.doi.org/​10.2139/​ssrn.3120​ 849; Susanto Basu, “Are Price-​Cost Markups Rising in the United States? A Discussion of the Evidence,” Journal of Economic Perspectives 33, no. 3 (2019): 3–​22, https://​doi.org/​10.1257/​ jep.33.3.3; Chris Edmond, Virgiliu Midrigan, and Daniel Yi Xu, “How Costly Are Markups?,” NBER Working Paper 24800, July 2018, https://​doi.org/​10.3386/​w24​800; Emmanuel Farhi and François Gourio, “Accounting for Macro-​finance Trends: Market Power, Intangibles, and Risk Premia,” Brookings Papers on Economic Activity 2018 (Fall): 147–​250, https://​doi. org/​10.1353/​eca.2018.0024; Basu, “Price-​Cost Markups”; Anna Stansbury and Lawrence H. Summers, “The Declining Worker Power Hypothesis: An Explanation for the Recent Evolution of the American Economy,” NBER Working Paper 27193, May 2020, https://​doi. org/​10.3386/​w27​193. 9. Gautam Mukunda, “How the Financial Sector’s Outsize Influence Is Undermining Business,” Harvard Business Review, June 2014, 71–​78; Clayton M. Christensen and Derek van Bever, “The Capitalist’s Dilemma,” Harvard Business Review, June 2014, 61–​68; Joseph A. Stiglitz, Rewriting the Rules of the American Economy: An Agenda for Growth and Shared Prosperity (New York: Roosevelt Institute, 2015); Stiglitz, “Fed Policy.” 10. Clay Christensen, “The Capitalist’s Dilemma,” RSA Journal 159, no. 5555 (2013): 48; Christensen and van Bever, “The Capitalist’s Dilemma.” 11. Christensen, “The Capitalist’s Dilemma,” 67. 12. Financial Crisis Inquiry Commission, Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (Washington, DC, January 2011), xix. 13. Technically, value-​added refers to the total value of the output of an industry minus the costs of producing the output. It includes the total value of profits, wages, and taxes paid, less the cost of the inputs used for production. Therefore it summarizes the total amount of the value added by the industry through its production process to the goods and services used as inputs to produce the output. 14. Mariana Mazzucato, The Value of Everything: Making and Taking in the Global Economy (London: Allen Lane, 2018); Office for National Statistics, “Financial Intermediation Services Indirectly Measured (FISIM) in the UK Revisited,” April 24, 2017, https://​www. ons.gov.uk/​econ​omy/​gros​sdom​esti​cpro​duct​gdp/​artic​les/​financialintermediationservicesin directlyme​asur​edfi​simi​nthe​ukre​visi​ted/​2017-​04-​24. 15. David Hope and Angelo Martelli, “The Transition to the Knowledge Economy, Labor Market Institutions, and Income Inequality in Advanced Democracies,” World Politics 71, no. 2 (2019): 236–​288, https://​doi.org/​10.1017/​S00438​8711​8000​333. 16. Rajan, The Third Pillar. 17. Dean Corbae and Pablo D’Erasmo, “A Quantitative Model of Banking Industry Dynamics,” FRED St. Louis, November 14, 2012, https://​www.frb​atla​nta.org/​-​/​media/​Docume​nts/​ news/​conf​eren​ces/​2012/​bank​ers-​unc​onve​ntio​nal-​polic​ies/​cor​bae.pdf. 18. Richard W. Stevenson, “G. A. O. Puts Cost of S & L Bailout at Half a Trillion Dollars,” New York Times, July 13, 1996; Matthew Sherman, “A Short History of Financial Deregulation in the United States,” Center for Economic and Policy Research, July 2009 (Washington, DC).

 



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19. James Kwak, “Cultural Capture and the Financial Crisis,” in Preventing Regulatory Capture: Special Interest Influence and How To Limit It, ed. Daniel Carpenter and David A. Moss (New York: Cambridge University Press, 2014), 71–​73. 20. Manuel Roig-​Franzia, “Credit Crisis Cassandra,” Washington Post, May 26, 2009; cf. Simon Johnson and James Kwak, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown (New York: Pantheon Books, 2010), 9. 21. Paul Muolo and Mathew Padilla, Chain of Blame: How Wall Street Caused the Credit and Mortgage Crisis (New York: Wiley, 2010), 85–​86. 22. Heather McGhee, The Sum of Us: What Racism Costs Everyone and How We Can Prosper Together (New York: One World, 2021), 89–​91. 23. Jo Becker, Sheryl Gay Stolberg, and Stephen Labaton, “White House Philosophy Stoked Mortgage Bonfire,” New York Times, December 20, 2008. 24. John R. Brooks and Adam J. Levitin, “Redesigning Education Finance: How Student Loans Outgrew the ‘Debt’ Paradigm,” Georgetown Law Journal 109, no. 5 (2020): 36–​38. 25. Barney Frank, Frank: A Life in Politics from the Great Society to Same-​ Sex Marriage (New York: Farrar, Straus and Giroux, 2015), 261. 26. https://​fred.stl​ouis​fed.org/​ser​ies/​DDOI0​4USA​066N​WDB. Data from before 1996 and after 2014 were not reported. 27. The Lerner Index is the difference between price and marginal cost. It is defined as L =​(P –​ MC) /​P where P refers to price and MC refers to marginal cost. A firm with no market power must set price equal to marginal cost, so L =​0. Where the seller can set price well above marginal cost, market power approaches 1. In practice, of course, it is often extremely difficult to calculate marginal cost. The higher the value of the Lerner Index for a firm or industry, therefore, the higher its market power. 28. For example, Owen Cass, “The Corporate Erosion of Capitalism: A Firm-​Level Analysis of Declining Business Investment, 1971–​2017,” American Compass Research, March 2021; Stiglitz, “How to Restore”; Stiglitz, “Origins of Inequality”; Stiglitz, “Fed Policy”; Joseph Stiglitz, “New Theoretical Perspectives on the Distribution of Income and Wealth among Individuals: Part I. The Wealth Residual,” NBER Working Paper 21189, May 2015, https://​ doi.org/​10.3386/​w21​189. 29. Xiaoqing Eleanor Xu and Miki Ortiz-​Eggenberg, “Student Loan Asset-​Backed Securities: The Next Market in Crisis?,” Journal of Fixed Income 30, no. 2 (Fall 2020): 26–​28, https://​doi.org/​ 10.3905/​jfi.2020.1.096. 30. Ella Koeze and Karl Russell, “The Toll of Student Debt in the U. S.,” August 26, 2022, New York Times. https://​www.nyti​mes.com/​inte​ract​ive/​2022/​08/​26/​your-​money/​stud​ ent-​loan-​forg​iven​ess-​debt.html#:~:text=​More%20t​han%2045%20mill​ion%20peo​ple,educat​ ion%20has%20co​ntin​ued%20to%20r​ise. 31. Sahay et al., “Rethinking Financial Deepening.” 32. Cihák and Sahay, “Finance and Inequality”; Sahay et al., “Rethinking Financial Deepening.” 33. Gillian B. White, “What’s at Stake in the Fight over the CFPB,” The Atlantic, December 5, 2017. 34. Michael Neal, “Mortgage Debt Has Peaked. Why Has the Share of Homeowners with a Mortgage Fallen to a 13-​Year Low?” Urban Institute, August 20, 2019, https://​www.urban. org/​urban-​w ire/​mortg​age-​debt-​has-​pea​ked-​w hy-​has-​share-​hom​eown​ers-​mortg​age-​fal​ len-​13-​year-​low#:~:text=​The%20sh​are%20of%20hom​eown​ers%20w ​ith%20a%20m​ortg​ age%20d​ecli​ned%20s​tead​ily%20betw​een,the%20s​ame%20n​ine%2Dy​ear%20per​iod; FRED St. Louis, https://​fred.stl​ouis​fed.org/​ser​ies/​RSAHOR​USQ1​56S. 35. Tobin, “Efficiency of the Financial System.” 36. Bureau of Economic Analysis, Interactive Data, Interactive Access to Industry Accounts Data, https://​apps.bea.gov/​iTa​ble/​iTa​ble.cfm?reqid=​150&step=​2&isuri=​1&cat​egor​ies=​gdp​xin. 37. Cass, “Corporate Erosion of Capitalism.” 38. Cass, “Corporate Erosion of Capitalism,” 6. 39. Wall Street welcomed Senator Charles Schumer’s elevation to the post of majority leader in 2015, knowing Schumer as a consistent friend of the financial industry. As the senior Democrat on the Senate Banking Committee, Schumer had received millions of dollars in campaign contributions from financial firms. In 2009, he received five times more than

 

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any Republican senator from the sector. M. J. Lee, “Wall Street Welcomes Expected Chuck Schumer Promotion,” CNN Politics, March 27, 2015; Lisa Lerer and Victoria McGrane, “Wall Street Rains Money on Schumer,” Politico, September 28, 2009. 40. Suzanne Mettler, The Submerged State: How Invisible Government Policies Undermine American Democracy, Kindle ed. (Chicago: University of Chicago Press, 2011), location 1515. 41. David Reiss, “The Role of the Fannie Mae /​Freddie Mac Duopoly in the American Housing Market,” Journal of Financial Regulation and Compliance 17, no. 3 (2009): 336–​348, https://​ doi.org/​10.1108/​135819​8091​0972​269; Oonagh McDonald, Fannie Mae and Freddie Mac: Turning the American Dream into a Nightmare (London: Bloomsbury Academic, 2012. 42. Norbert Michel, “Fannie and Freddie Mac Need Strict Bank-​Like Capital Requirements,” Forbes, March 9, 2020, https://​www.for​bes.com/​sites/​norber​tmic​hel/​2020/​03/​09/​fan​nie-​ mae-​and-​fred​die-​mac-​need-​str​ict-​bank-​like-​capi​tal-​requi​reme​nts/​?sh=​406bf​f 003​626. 43. Mettler, The Submerged State, loc. 1515. 44. Brooks and Levitin, “Redesigning Education Finance.” 45. Mettler, The Submerged State, loc. 501. 46. Dustin Jenkins, The Bonds of Inequality: Debt and the Making of the American City (Chicago: University of Chicago Press, 2022). 47. Dustin Jenkins, “Loan Sharks, Mortgage Bankers, and Bond Financiers: New Perspectives on Banking in American Cities,” Journal of Urban History 47, no. 6 (2020): 1394–​1401, https://​ doi.org/​10.1177/​00961​4422​0954​400; Eleni Schirmer, “We’re Burying Our Kids in Debt ( Just Not the Way You Think),” New York Times, August 27, 2021. 48. As in the United States’ subprime mortgage crisis, when the market value of the securitized mortgage loans plummeted, leading to a wider financial crisis and economic recession, financialization through the securitization of overvalued assets brings risks borne not only by investors. Bailouts of large institutions offering investors attractive securitized financial instruments, whether these be partially public (such as Fannie Mae and Freddie Mac) or fully private entities such as Bear Stearns and the American International Group (AIG), on the grounds that they are “systemically important” redistribute revenues from the public to their owners and investors. 49. A report from the Joint Committee on Taxation outlines the provisions of the law. Joint Committee on Taxation, “Qualified Opportunity Zones: An Overview,” June 2019, https://​ www.jct.gov/​publi​cati​ons/​2019/​qualif​i ed-​oppo​rtun​ity-​zones-​an-​overv​iew/​. 50. David Wessel, “The Rich Have Found Another Way to Pay Less Tax,” New York Times, October 10, 2021; David Wessel, Only the Rich Can Play: How Washington Works in the New Gilded Age (New York: Public Affairs, 2021). 51. W. Scott Frame, Andreas Fuster, Joseph Tracy, and James Vickery, “The Rescue of Fannie Mae and Freddie Mac,” Journal of Economic Perspectives 29, no. 2 (2105): 25–​52. 52. Mettler, The Submerged State. Mettler notes that by 2007, Sallie Mae was spending more than any credit or financial company except Visa on lobbying. Mettler, locs. 71–​79. 53. “A Rationale for Continued Deregulation of the Banking Industry,” excerpts from the Economic Report of the President, February 6, 1986, American Banker, February 26, 1986, https://​adva​nce-​lexis-​com.ezp-​prod1.hul.harv​ard.edu/​api/​docum​ent?col​lect​ion=​ news&id=​urn:cont​entI​tem:3S8H-​3SJ0-​000F-​R0H1-​00000-​00&cont​ext=​1516​831. 54. IMF, Global Financial Stability Report: Moving from Liquidity-​to Growth-​Driven Markets (Washington, DC: IMF, April 2014), https://​www.imf.org/​en/​Publi​cati​ons/​GFSR/​Iss​ues/​ 2016/​12/​31/​Glo​bal-​Financ​ial-​Stabil​ity-​Rep​ort-​April-​2014-​Mov​ing-​from-​Liquid​ity-​to-​Gro​ wth-​Dri​ven-​Mark​ets-​41122; Robin Harding and Ralph Atkins, “Problem of Banks Seen as ‘Too Big to Fail’ Still Unsolved, IMF Warns,” FT.com, March 31, 2014, https://​www.ft.com/​ cont​ent/​60f1c​218-​b8b2-​11e3-​835e-​00144​feab​dc0. 55. Kwak, “Cultural Capture,” 71–​73. 56. Eric Lipton and Stephen Labaton, “Deregulator Looks Back, Unswayed,” New York Times, November 16, 2008. https://​www.nyti​mes.com/​2008/​11/​17/​busin​ess/​econ​omy/​17gr​ amm.html. The New York Times article adds: “He and his staff often appeared at industry-​ sponsored speaking events around the country.” 57. Americans for Financial Reform, “Wall Street Money in Washington,” April 2019; Jeff Stein, “As Bank Profits Soar, Wall Street’s Political Spending Hits New High,” Washington Post, April

 



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30, 2019, https://​www.was​hing​tonp​ost.com/​busin​ess/​2019/​04/​30/​bank-​prof​i ts-​soar-​wall-​ stre​ets-​politi​cal-​spend​ing-​hits-​new-​high/​. 58. Gupta and Swenson show that for each dollar spent on campaign contributions in 1983–​84 to the members of Congress on the tax-​writing committee at the time that the DISC tax break was enacted yielded $1,500–​$2,000 in returns to firm profits and manager bonuses. Cf. Sanjay Gupta and Charles W. Swenson, “Rent Seeking by Agents of the Firm,” Journal of Law and Economics 46, no. 1 (April 2003): 253–​268, https://​doi.org/​10.1086/​345​579. A DISC is a “domestic international sales corporation.” It is a legal structure that allows shareholders to enjoy lower income tax rates on revenues generated from the export of US-​made products overseas. 59. Alan Rappeport, “Trump Promised to Kill Carried Interest. Lobbyists Kept It Alive,” New York Times, December 22, 2017; Jesse Drucker and Danny Hakim, “Private Inequity: How a Powerful Industry Conquered the Tax System,” New York Times, June 12, 2021. 60. Aime Williams and Caitlin Greenwood, “Sinema Is Significant Beneficiary of the Private Equity Lobbying Machine,” Financial Times, August 6, 2022. 61. As Chapter 4 explained, C corporations are corporations whose income is taxable and enjoy limited liability, unlimited life spans, and the right to transfer ownership freely. S corporations have similar benefits, except that their income is not taxable but rather is treated as the personal income of their owners. They must not exceed a certain limit of employees. 62. See Robin Greenwood and David Scharfstein, “The Growth of Finance,” Journal of Economic Perspectives 27, no. 2 (2013): 3–​28, https://​doi.org/​10.1257/​jep.27.2.3; Reuters Staff, “U. S. Treasury to Close ‘Carried Interest’ Loophole in New Tax Law,” Reuters, March 1, 2018; Aysha Bagchi, “Carried Interest Tax Rules Could Bring Legal Fights for Treasury,” Daily Tax Report, Bloomberg, August 4, 2020, news.bloombergtax.com/​ daily-​carried-​interest-​tax-​rules-​could-​bring-​legal-​fights-​for-​treasury. 63. Drucker and Hakim, “Private Inequity.” 64. Stein, “As Bank Profits Soar.” 65. Data from the Center for Responsive Politics. Chris Cumming, “Private Equity Smashes Its Campaign-​Spending Record with 2020 Races,” Wall Street Journal, October 25, 2020. The great majority of this has gone to Republicans. 66. Her original proposal was published in 2007: Elizabeth Warren, “Unsafe at Any Rate,” Democracy: A Journal of Ideas, Summer 2007, https://​democ​racy​jour​nal.org/​magaz​ine/​5/​ uns​afe-​at-​any-​rate/​. 67. White, “What’s at Stake”; Sheelah Kolhatkar, “The Steady, Alarming Destruction of the Consumer Financial Protection Bureau,” New Yorker, February 7, 2018. 68. Jeb Hensarling, “How We’ll Stop a Rogue Agency,” Wall Street Journal, February 8, 2017, https://​www.wsj.com/​artic​les/​how-​well-​stop-​a-​rogue-​fede​ral-​age​ncy-​148​6597​413. 69. Pratin Vallabhaneni, “US Supreme Court Rules CFPB’s Leadership Structure Is Unconstitutional but Leaves CFPB Intact,” Whitecase.com, July 8, 2020. https://​www. whitec​ase.com/​publi​cati​ons/​alert/​us- ​supr​eme-​court-​r ules-​cfpbs-​lea​ders​hip-​struct​ure-​ uncon​stit​utio​nal-​lea​ves-​cfpb#:~:text=​Law%20LLC%20v.-​,Consu​mer%20Fi​nanc​ial%20Pro​ tect​ion%20Bur​eau.,vio​lati​ons%20of%20te​lema​rket​ing%20sa​les%20ru​les. 70. Greenwood and Scharfstein, “The Growth of Finance,” 6. 71. Greenwood and Scharfstein, “The Growth of Finance,” 22. 72. Emmanuel Farhi and Jean Tirole, “Shadow Banking and the Four Pillars of Traditional Financial Intermediation,” Review of Economic Studies 88, no. 6 (2021): 2622–​2653, https://​ doi.org/​10.1093/​res​tud/​rdaa​059. 73. Mettler, Submerged State, locs. 1628, 1631. 74. Jonathan Rothwell, “Make Elites Compete: Why the 1% Earn So Much and What To Do about It,” Brookings Institution, March 25, 2016, 6. 75. Thomas Philippon and Ariell Reshef, “Wages and Human Capital in the U.S. Finance Industry: 1909–​2006,” Quarterly Journal of Economics 127, no. 4 (November 2012): 1605, https://​doi.org/​10.1093/​qje/​qjs​030. 76. Steven N. Kaplan and Joshua Rauh, “Wall Street and Main Street: What Contributes to the Rise in the Highest Incomes?” Review of Financial Studies 23, no. 3 (March 2010): 1004–​ 1050, https://​doi.org/​10.1093/​rfs/​hhp​006.

 

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77. Philippon and Reshef, “Wages and Human Capital.” 78. Thomas Philippon, The Great Reversal: How America Gave Up on Free Markets (Cambridge, MA: Harvard University Press, 2019), 108. 79. Lowell R. Ricketts, “Quantitative Easing Explained,” April 2011, Liber8 (Economic Information Newsletter), St. Louis, MO: Federal Reserve Bank of St. Louis). As Al-​Jassar and Moosa conclude, “QE had a big, but not exclusive, effect on stock prices.” Sulaiman A. Al-​Jassar and Imad A. Moosa, “The Effect of Quantitative Easing on Stock Prices: A Structural Time Series Approach,” Applied Economics 51, no. 17 (2019): 1826, https://​doi. org/​10.1080/​00036​846.2018.1529​396; Stiglitz, “Fed Policy.” 80. Al-​Jassar and Moosa, “Effect of Quantitative Easing.” 81. Al-​Jassar and Moosa, “Effect of Quantitative Easing.” 82. Edward N. Wolff, “Who Owns Stock in American Corporations,” Proceedings of the American Philosophical Society 158, no. 4 (2014): 372–​391; Edward N. Wolff, “Household Wealth Trends in the United States, 1962–​2016: Has Middle Class Wealth Recovered?,” NBER Working Paper 24085 (November 2017), 74, https://​doi.org/​10.1111/​j.1475-​4991.1994. tb00​056.x. 83. The returns are the profits or losses to investors from stock transactions. The prices of stocks reflect the value that the market places on the assets. An investor who buys stock shares at a low price and sells them at a higher price obtains a positive return, whereas buying high and selling low yields a negative return. The expected return is the return multiplied by the estimated probability of realizing it. Therefore, to obtain a high return, an investor must accept a high level of risk—​or else shift the risk to someone else. 84. Calculated from data provided by the Stern School of Business, NYU, Historical Returns on Stocks, Bonds and Bills, 1928–​2022. http://​pages.stern.nyu.edu/​~adamo​dar/​New_​Ho​me_​ P​age/​dataf​i le/​histre​tSP.html. 85. Oscar Jorda, Katharina Knoll, Dmitry Kuvshinov, et al., “The Rate of Return on Everything, 1870–​2015,” Quarterly Journal of Economics 134, no. 3 (2019): 1225–​1298, https://​doi.org/​ 10.1093/​qje/​qjz​012. 86. Heather Gillers, “Underfunded and under Pressure, U.S. Pensions to Keep Investing in China,” Wall Street Journal, February 20, 2021. 87. A prominent recent example is Alibaba. Among the investors in Alibaba’s Ant Group, which operates as a fintech lending platform, are a number of China’s senior political leaders as well as some of the largest state investment funds. These connections enabled the company to achieve high profits for the firm’s shareholders by receiving favorable regulatory treatment from the government, while transferring risk to the state budget.   Lingling Wei, “China Blocked Ant Group’s IPO after Investigation Revealed Likely Beneficiaries,” Wall Street Journal, February 16, 2021. According to the Wall Street Journal report, the fact that a number of the investors in the Ant Group were members of political factions at odds with Xi Jinping was one of the reasons that the Xi government abruptly stopped the impending IPO of the Ant Group in November 2020 after a fast approval process in the summer. 88. Lawrence H. Summers and Ed Ball, Report of the Commission on Inclusive Prosperity (Washington DC: Center for American Progress, January 2015), 52. 89. Rajan and Zingales, Saving Capitalism. 90. Stiglitz, “Fed Policy”; Joseph E. Stiglitz, Freefall: America, Free Markets, and the Sinking of the World Economy (New York: Norton, 2010).

Chapter 7 1. On the ideological roots of Putin’s war, see Timothy Snyder, The Road to Unfreedom: Russia, Europe, America (New York Vintage Arrow, 2019). 2. Bryn Rosenfeld, The Autocratic Middle Class: How State Dependency Reduces the Demand for Democracy (Princeton, NJ: Princeton University Press, 2020); Thomas F. Remington, “The Russian Middle Class as Policy Objective,” Post-​Soviet Affairs 27, no. 2 (2011): 1–​37. 3. Thomas F. Remington, “Russian Economic Inequality in Comparative Perspective,” Comparative Politics 50, no. 3 (April 2018): 395–​416.

 



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4. Mariia Zheleznova, “Bednost’ optimistov,” Vedomosti, June 29, 2017. 5. Novye izvestiia, August 18, 2022. 6. Aleksei Shapovalov, “Zhizn’ ‘ot zarplaty do zarplaty’ okazalas’ statusnoi,” Kommersant, August 28, 2018. 7. In Germany, France, and Finland, 72%–​75% of households are in the middle-​income group. In Denmark, Norway, and the Netherlands, the figure is as high as 80%. Rakesh Kochhar, “Middle Class Fortunes in Western Europe,” Pew Research Center, May 25, 2017 8. Credit Suisse Global Wealth Databook, 2021. 9. Priamaia liniia, June 7, 2018, https://​www.1tv.ru/​shows/​vystu​plen​iya-​pre​zide​nta-​ros​sii/​ pryam​aya-​lin​iya-​2018/​pryam​aya-​lin​iya-​s-​vla​dimi​rom-​puti​nym-​2018-​poln​aya-​vers​iya. 10. The law was passed in 2020 and took effect in 2022. See Federal'nyi zakon “O vnesenii izmenenii v chast’ vtoruiu Nalogovogo kodeksa Rossiiskoi Federatsii v chasti nalogooblozheniia dokhodov fizicheskikh lits, prevyshaiushchikh 5 millionov rublei za nalogovyi period” ot 23.11.2020 N 372-​FZ (posledniaia redaktsiia), November 23, 2020, Konsul'tant Plius   http://​www.con​sult​ant.ru/​docum​ent/​cons​_​doc​_​L AW​_​368​439/​ and Federal'nyi zakon ot 23.11.2020 N 372-​FZ (red. ot 19.12.2022) “O vnesenii izmenenii v chast' vtoruiu Nalogovogo kodeksa Rossiiskoi Federatsii v chasti nalogooblozheniia dokhodov fizicheskikh lits, prevyshaiushchikh 5 millionov rublei za nalogovyi period” ot 23.11.2020 N 372-​FZ (posledniaia redaktsiia), Konsul'tant Plius   http://​www.con​sult​ant.ru/​docum​ent/​cons​_​doc​_​L AW​_​368​439/​b004fed0b70d0​f223​ e4a8​1f8a​d6cd​92af​90a7​e3b/​. 11. The Soviet regime conscripted labor in 1920, during the civil war, and again under Stalin in 1940 until it was formally abolished in 1959. Thomas F. Remington, Building Socialism in Bolshevik Russia: Ideology and Industrial Organization, 1917–​1921 (Pittsburgh, PA: University of Pittsburgh Press, 1984), 88–​89; Sheila Fitzpatrick, “War and Society in the Soviet Context: Soviet Labor before, during, and after World War II,” International Labor and Working-​Class History 35 (Spring 1989): 37–​52. 12. Recently, the Putin regime has returned to the practice of assigning convicts in the penal system to work on construction projects. 13. Vasilii Seliunin, “Istoki,” in Vasilii Seliunin and Nikolai Shmelev, Istoki; Avansy i dolgi (Moscow: Pravda, 1990), 131–​189; Wu Jinglian and Ma Guochan, Whither China? Restarting the Reform Agenda, trans. Xiaofeng Hua and Nancy Hearst (New York: Oxford University Press, 2016); http://​tth​hee.blog.sohu.com/​9488​790.html; http://​fina​nce.ifeng.com/​a/​ 20131​227/​113​5667​8_​0.shtml; http://​fina​nce.ifeng.com/​opin​ion/​spec​ial/​shour​ufen​pei/​ zjgc/​20100​220/​1837​402.shtml. 14. For example, Thomas Piketty, Li Yang, and Gabriel Zucman, “Capital Accumulation, Private Property and Rising Inequality in China, 1978–​2015,” American Economic Review 109, no. 7 (2019): 2469–​2496; Filip Novokmet, Thomas Piketty, and Gabriel Zucman, “From Soviets to Oligarchs: Inequality and Property in Russia, 1905–​2016,” NBER Working Paper 23712, August 2017; Thomas Piketty, Capital and Ideology (Cambridge, MA: Harvard University Press, 2020). 15. Useful studies include Daniel Treisman, The Return: Russia’s Journey from Gorbachev to Medvedev (New York: Free Press, 2012); Anders Åslund, How Russia Became a Market Economy (Washington, DC: Brookings Institution, 1995); Anders Åslund, Building Capitalism: The Transformation of the Former Soviet Bloc (Cambridge: Cambridge University Press, 2002); Anders Åslund, Russia’s Capitalist Revolution: Why Market Reform Succeeded and Democracy Failed (Washington, DC: Peterson Institute for International Economics, 2007); Anders Åslund, How Capitalism Was Built: The Transformation of Central and Eastern Europe, Russia, and Central Asia (Cambridge: Cambridge University Press, 2007); Andrei Shleifer and Daniel Treisman, Without a Map: Political Tactics and Economic Reform in Russia (Cambridge, MA: MIT Press, 2000); Thane Gustafson, Capitalism Russian-​Style (Cambridge: Cambridge University Press, 1999). 16. On the principles guiding liberalization in the postcommunist world, see Jeffrey Sachs and Wing Thye Woo, “Structural Factors in the Economic Reforms of China, Eastern Europe, and the Former Soviet Union,” Economic Policy 918 (April 1994): 101–​145; Jeffrey Sachs and

 

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David Lipton, “Poland’s Economic Reform,” Foreign Affairs 69, no. 3 (Summer 1990): 47–​66; Jeffrey Sachs, Poland’s Jump to the Market Economy (Cambridge, MA: MIT Press, 1993). 17. The Hungarian economist Janos Kornai introduced the term “hard budget constraints.” He showed that in the communist planned system, where enterprises were required to meet plan targets but not to pursue profit through efficiency and innovation, the government subsidized enterprises through cheap credits and low state prices on raw materials. Shock therapy was to force enterprises to increase productivity by imposing strict budget discipline on them. See Janos Kornai, The Socialist System: The Political Economy of Communism (Princeton, NJ: Princeton University Press, 1992). 18. Roman Frydman, Andrzej Rapaczynski, John S. Earle, et al., The Privatization Process in Russia, Ukraine and the Baltic States (Budapest: Central European University Press, 1993), 7. 19. As Chapter 3 explained, an economic rent is defined as the price of a good that is fixed in supply. The price is therefore determined entirely by demand. Rent-​seeking is the attempt to keep supply fixed in order to be able to collect rents. A monopolist who successfully lobbies government for the right to maintain the monopoly will be able to collect monopoly rents. The concept of rent-​seeking is useful in understanding much of the political activity of Russia’s “early winners.” 20. Paul L. Joskow, Richard Schmalensee, and Natalia Tsukanova, “Competition Policy in Russia during and after Privatization,” Brookings Papers on Economic Activity: Microeconomics 1994: 319. 21. Narodnoe khoziastvo SSSR v 1984 g. (Moscow: Goskomstat, 1984), 131. 22. Edward A. Hewett, Reforming the Soviet Economy: Equality versus Efficiency (Washington, DC: Brookings Institution, 1988), 115. 23. Harry G. Broadman, “Reducing Structural Dominance and Entry Barriers in Russian Industry,” Review of Industrial Organization 17 (2000): 155–​176. 24. Annette N. Brown, Barry W. Ickes, and Randi Ryterman, “The Myth of Monopoly: A New View of Industrial Structure in Russia,” World Bank Policy Research Working Paper 1331, 1994, 35. 25. Anders Åslund, “How Small Is Soviet National Income?,” in The Impoverished Superpower: Perestroika and the Soviet Military Burden, ed. Henry S. Rowen and Charles Wolf Jr. (San Francisco: Institute for Contemporary Studies, 1990), 49. 26. Egor Gaidar, Days of Defeat and Victory (Seattle: University of Washington Press, 2012); 27. Martin Gilman, No Precedent, No Plan: Inside Russia’s 1998 Default (Cambridge, MA: MIT Press, 2010). 28. McKinsey Global Institute, Unlocking Economic Growth in Russia (Moscow, 1999). 29. Clifford G. Gaddy and Barry W. Ickes, Russia’s Virtual Economy (Washington, DC: Brookings Institutions Press, 2002); David Woodruff, Money Unmade: Barter and the Fate of Russian Capitalism (Ithaca, NY: Cornell University Press, 1999); Juliet Johnson, A Fistful of Rubles: The Rise and Fall of the Russian Banking System (Ithaca, NY: Cornell University Press, 2000). 30. Vladimir E. Gimpel’son and R. I. Kapeliushnikov, Nestandartnaia zaniatost’ v rossiiskoi ekonomike (Moscow: Izdatel’skii dom GU VShE, 2006); Vladimir E. Gimpelson and R. I. Kapeliushnikov, “Zhit’ ‘v teni’ ili umeret’ ‘na svetu’: neformal’nost’ na rossiiskom rynke truda,” Voprosy Ekonomiki 11 (2013): 65–​88. 31. Åslund, How Russia Became a Market Economy, 149–​150. 32. Joseph R. Blasi, Maya Kroumova, and Douglas Kruse, Kremlin Capitalism: Privatizing the Russian Economy (Ithaca, NY: Cornell University Press, 1997), 171; Shleifer and Treisman, Without a Map, 42. A good account of the central bank’s high-​handedness in this period is Johnson, A Fistful of Rubles, 64–​97. 33. Ol’ga Kryshtanovskaia, “Finansovaia oligarkhiia v Rossii,” Izvestiia, January 10, 1996, 5. The author is a respected sociologist who heads the sector for the study of the elite of the Institute of Sociology of the Russian Academy of Sciences. Also see Blasi, Kroumova, and Kruse, Kremlin Capitalism, 155–​157. 34. Thomas F. Remington, Presidential Decrees in Russia: A Comparative Perspective (New York: Cambridge University Press, 2014). 35. Chrystia Freeland, Sale of the Century: Russia’s Wild Ride from Communism to Capitalism (New York: Crown, 2000).

 



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36. Yuri Baturin et al., Epokha Yel’tsina: ocherki politicheskoi istorii (Moscow: Vagrius, 2001), 429. 37. Freeland, Sale of the Century, ch. 8. 38. Heidi Kroll, “Monopoly and Transition to the Market,” Soviet Economy 7, no. 2 (1991): 143–​174. 39. See Joskow, Schmalensee, and Tsukanova, “Competition Policy in Russia”; Broadman, “Reducing Structural Dominance”; Jim Leitzel, “A Note on Monopoly and Russian Economic Reform,” Communist Economies and Economic Transformation 6, no. 1 (1994): 45–​53; Simon Johnson and Heidi Kroll, “Managerial Strategies for Spontaneous Privatization,” Soviet Economy 7, no. 4 (1991): 281–​316. 40. Leitzel, “Note on Monopoly,” 46. 41. Leitzel, “Note on Monopoly,” 49. 42. Nikolai Shmelev, “Novye trevogi,” Novyi mir 4 (1988): 160–​175; Nikolai Shmelev, “Avansy i dolgi,” Novyi mir 6 (1987): 142–​158. 43. Johnson and Kroll, “Managerial Strategies,” 289ff. 44. Thane Gustafson, Wheel of Fortune: The Battle for Oil and Power in Russia (Cambridge, MA: Harvard University Press, 2012), 72. 45. Gustafson, Wheel of Fortune, 70. 46. Karen Dawisha, Putin’s Kleptocracy: Who Owns Russia? (New York: Simon & Schuster, 2014), 32–​33; Steven L. Solnick, Stealing the State: Collapse and Control in Soviet Institutions (Cambridge, MA: Harvard University Press, 1998). 47. Johnson and Kroll, “Managerial Strategies,” 303. 48. Johnson and Kroll, “Managerial Strategies,” 311. 49. Lynn D. Nelson and Irina Y. Kuzes, Property to the People: The Struggle for Radical Economic Reform in Russia (Armonk, NY: M.E. Sharpe, 1994), 28, 44. 50. The goals of the privatization program are laid out in a volume of essays by its chief Russian designers and their Western advisers. See, in particular, Anatoly B. Chubais and Maria Vishnevskaya, “Main Issues of Privatisation in Russia,” and Maxim Boycko and Andrei Shleifer, “The Voucher Programme for Russia,” both in Changing the Economic System in Russia, ed. Anders Åslund and Richard Layard (New York: St. Martin’s Press, 1993), 89–​99 and 100–​111. 51. Radio Free Europe /​Radio Liberty Daily Report, July 1, 1994. 52. Blasi, Kroumova, and Kruse, Kremlin Capitalism, 50. 53. European Bank for Reconstruction and Development, Transition Report 2001: Energy in Transition (London: EBRD, 2001), 12. 54. Solnick, Stealing the State; David E. Hoffman, The Oligarchs: Wealth and Power in the New Russia (New York: Public Affairs, 2002); Gustafson, Capitalism Russian-​Style; Freeland, Sale of the Century. 55. Timothy J. Frye, Building States and Markets after Communism: The Perils of Polarized Democracy (New York: Cambridge University Press, 2010); Åslund, Russia’s Capitalist Revolution; Gustafson, Capitalism Russian-​Style. 56. Hoffman, The Oligarchs, 312. 57. Freeland, Sale of the Century, 169. 58. Quoted in Timothy J. Colton, Yeltsin: A Life (Cambridge, MA: Harvard University Press, 2008), 355. 59. Boris Yeltsin, Midnight Diaries, trans. Catherine A. Fitzpatrick (New York: Public Affairs, 2000); Colton, Yeltsin; Baturin et al., Epokha Yel’tsina. 60. “Vyiti iz tupika,” Kommersant, April 27, 1996, https://​www.kom​mers​ant.ru/​doc/​132​ 055. Berezovsky wrote: “Серьезная политическая угроза таится в том, что в случае победы на президентских выборах коммунисты реально могут предпринять попытку идеологического реванша. Это дает основание в очередной раз видеть в них силу, желающую принимать окончательные и жизненно важные решения как бы от лица всего общества.” “There is a serious political threat in that if the communists win the presidential elections, they could really try to take ideological revenge. This gives grounds once again to see in them a force that wants to make final and vitally important decisions as if in the name of the entire society.” 61. Cited in Kommersant. https://​www.kom​mers​ant.ru/​doc/​3799​258.

 

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62. Quoted in Rose Brady, Kapitalizm: Russia’s Struggle to Free Its Economy (New Haven, CT: Yale University Press, 1999), 207. 63. David Hoffman, “Russia’s Clans Go to War,” Washington Post, October 26, 1997. 64. The term was invented by a Russian journalist as a play on the term semiboyarshchina, or “rule of the seven boyars” in the 17th century, when a small group of the most powerful aristocrats formed an interim government before the Romanov dynasty was installed on the throne. One reason the term was an overstatement was the fact that the power of the central government and major companies was counterbalanced by the major regional political machines controlled by governors. 65. Daniel Treisman, “ ‘Loans for Shares’ Revisited,” NBER Working Paper 15819, March 2010. 66. Colton, Yeltsin; Michael McFaul, Russia’s Unfinished Revolution: Political Change from Gorbachev to Putin (Ithaca, NY, Cornell University Press, 2001); Peter Reddaway and Dimitri Glinski, Tragedy of Russia’s Reforms: Market Bolshevism against Democracy (Washington, DC: U. S. Institute of Peace, 2001); M. Steven Fish, Democracy Derailed in Russia: The Failure of Open Politics (New York: Cambridge University Press, 2005). 67. VTsIOM (now Levada Center) data. 68. Lucy Chernykh, “Understanding Renationalizations in Russia,” Journal of Corporate Finance 17 (2011): 1237–​1253; Anders Åslund, “Russia’s Economy: Macroeconomic Stability but Minimal Growth,” Russian Analytical Digest 220 (May 16, 2018), 2–​4. 69. Anders Åslund, Russia’s Crony Capitalism: The Path from Market Economy to Kleptocracy (New Haven, CT: Yale University Press, 2019); Daniel Treisman, “Putin’s Silovarchs,” Orbis 51, no. 1 (2007): 141–​145; Thomas F. Remington, “Patronage and the Party of Power,” Europe-​Asia Studies 60, no. 6 (2008): 959–​987; Ora John Reuter, The Origins of Dominant Parties: Building Authoritarian Institutions in Post-​Soviet Russia (New York: Cambridge University Press, 2019). 70. A substantial body of scholarly literature has confirmed this. Among other articles, see Timothy Frye, Scott Gehlbach, Kyle L. Marquardt, and Ora John Reuter, “Is Putin’s Popularity Real?,” Post-​Soviet Affairs 33, no. 1 (2017): 1–​15 and Daniel Treisman, “Presidential Popularity in a Hybrid Regime: Russia under Yeltsin and Putin,” American Journal of Political Science 55, no. 3 (2011): 590–​609. Treisman argues that Putin’s high ratings, and Yeltsin’s low ratings, are directly related to trends in public assessments of the performance of the economy. Putin enjoyed a large surge of approval following the annexation of Crimea. See Henry E. Hale, “How Crimea Pays: Media, Rallying ’Round the Flag, and Authoritarian Support,” Comparative Politics, April 2018, 369–​380; Henry E. Hale, “Authoritarian Rallying as Reputational Cascade: Evidence from Putin’s Popularity Surge after Crimea,” American Political Science Review 116, no. 2 (2022): 580–​594. 71. Peter Pomerantsev, Nothing Is True and Everything Is Possible: The Surreal Heart of the New Russia (New York: Public Affairs, 2014), 71. 72. Henry Hale shows that this pattern characterizes a number of the “patronal” regimes of the former Soviet Union. Henry Hale, Patronal Politics: Eurasian Regime Dynamics in Comparative Perspective (New York: Cambridge University Press, 2015).. 73. Solnick, Stealing the State. 74. Kseniya Kizilova and Pippa Norris, “Assessing Russian Public Opinion on the Ukraine War,” Russian Analytical Digest 281 (March 29, 2022): 2–​7 75. Nicholas Eberstadt, “Russia’s Peacetime Demographic Crisis: Dimensions, Causes, Implications,” National Bureau of Asian Research, NBR Project Report, May 2010. 76. REF/​RL Newsline, March 8, 1999. 77. RFE/​RL Newsline March 23, 2000. 78. RFE/​RL Daily Report, December 3, 1998; November 30, 1998. 79. Sabrina Tavernise, “Putin, Exerting His Authority, Meets with Russia’s Tycoons,” New York Times, July 29, 2000. 80. Cf. George Soros, “Who Lost Russia?,” New York Review of Books, April 13, 2000. 81. Berezovsky died in London in 2013, possibly by suicide. According to President Putin, he sent an abject letter to Putin, requesting forgiveness and an opportunity to return to Russia, but was turned down.

 



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82. On the Yukos affair, see William Tompson, “Putting Yukos in Perspective,” Post-​Soviet Affairs 21, no. 2 (2005): 159–​181; and Richard Sakwa, Putin and the Oligarch: The Khodorkovsky-​ Yukos Affair (New York: I.B. Tauris, 2014). 83. Segodnia, October 7. 2000. 84. Remington, Politics in Russia, 154. 85. Treisman, “Putin’s Silovarchs”; Dawisha, Putin’s Kleptocracy. 86. Natalia Lamberova and Konstantin Sonin, “Economic Transition and the Rise of Alternative Institutions: Political Connections in Putin’s Russia,” Economics of Transition 26 (2018): 615–​648. 87. Novokmet et al. estimate that offshore Russian private wealth is about $800 billion. Novokmet, Piketty, and Zucman, “From Soviets to Oligarchs”; Åslund, Russia’s Crony Capitalism, 167–​169. 88. Åslund, Russia’s Crony Capitalism, 175. 89. Cf. the prevalance of family-​owned business groups magnifying their power over the economy through pyramidal ownership relations with firms in multiple sectors. Randall Morck, Daniel Wolfenzon, and Bernard Yeung, “Corporate Governance, Economic Entrenchment, and Growth,” Journal of Economic Literature 43 (September 2005): 655–​720. 90. Russell Pittman, “Some Critical Provisions in the Antimonopoly Laws of Central and Eastern Europe,” International Lawyer 26, no. 2 ( January 1, 1992): 485–​503; Joskow, Schmalensee, and Tsukanova, “Competition Policy in Russia,” 335ff. For a text of the law see https://​cis-​legi​slat​ion.com/​docum​ent.fwx?rgn=​1635#. 91. Joskow, Schmalensee, and Tsukanova, “Competition Policy in Russia,” 336. 92. https://​15ye​ars.fas.gov.ru/​. 93. Wing Thye Woo, “The Art of Reforming Centrally Planned Economies: Comparing China, Poland, and Russia,” Journal of Comparative Economics 18 (1994): 288. 94. Bernard Black, Reinier Kraakman, and Anna Tarassova, “Russian Privtization and Corporate Governance: What Went Wrong?,” Stanford Law Review 52, no. 6 ( July 2000): 1741. 95. Chernykh, “Understanding Renationalizations in Russia,” 1239. 96. Gustafson, Wheel of Fortune. 97. Boone and Rodionov, “Rent Seeking,” UBS Warburg, 2002. 98. Sergei Guriev and Andrei Rachinsky, “The Role of Oligarchs in Russian Capitalism,” Journal of Economic Perspectives 19, no. 1 (Winter 2005): 135. 99. Sergei Guriev and Andrei Rachinsky, “Ownership Concentration in Russian Industry,” Background Paper for Russian CEM 2003, March 2004. 100. Treisman, “ ‘Loans for Shares’ Revisited.” 101. Guriev and Rachinsky, “Ownership Concentration”; Joskow, Schmalensee, and Tsukanova, “Competition Policy in Russia.” 102. Igor Filatochev, Rostislav Kapelyushnikov, Natalya Dyomina, and Sergey Auktsionek, “The Effects of Ownership Concentration on Investment and Performance in Privatzied Firms in Russia,” Managerial and Decision Economics 22 (2001): 299–​313. 103. Joskow, Schmalensee, and Tsukanova, “Competition Policy in Russia,” 362. 104. Joskow, Schmalensee, and Tsukanova, “Competition Policy in Russia,” 339. 105. Joskow, Schmalensee, and Tsukanova, “Competition Policy in Russia,” 355–​356. 106. Broadman, “Reducing Structural Dominance,” 166. 107. Broadman, “Reducing Structural Dominance,” 160. 108. Igor’ Artem’ev (interview), “Glava FAS nasval ekonomiku otstaloi i polufeodal’noi,” Kommersant, September 25, 2018. 109. N. A. Pakhomova and E. A. Nekrasova, “Konkurentnaia politika i razvitie antimonopol’nogo regulirovaniia v Rossii,” Vestnik Sankt-​ Peterburgskogo universitata, Ekonomika 8, no. 3 (2013): 25–​36; Svetlana Avdasheva and Andrei Shastitko, “Russian Anti-​trust Policy: Power of Enforcement versus Quality of Rules,” Post-​communist Economies 23, no. 4 (2011): 493–​ 505; Svetlana Avdasheva, Svetlana Golovanova, and Yannis Katsoulacos, “The Impact of Performance Measurement on the Selection of Enforcement Targets by Competition Authorities: The Russian Experience in an International Context,” Public Performance and Management Review 42, no. 2 (2019): 329–​356;Yannis Katsoulacos, Svetlana Avdasheva,

 

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and Svetlana Golovanova, “Legal Standards and the Role of Economics in Competition Law Enforcement,” European Competition Journal 12, no. 2 (2016): 277–​297. 110. 1991 figures calculated from Joskow, Schmalensee, and Tsukanova, “Competition Policy in Russia”; and from https://​ data.gov.ru/​opendata/​7708234640-​fourathreeazeroafourafour. 111. Figures are for 2011. https://​ data.gov.ru/​opendata/​7708234640-​fourathreeazeroafourafour. 112. Tat’iana Kulistikova, “Lidery rossiiskoi pashni. Top-​22 agrokholdingov po zemliam b obrabotke,” Agroinvestor, October 11, 2017, https://​www.agroi​nves​tor.ru/​mark​ets/​arti​ cle/​28453-​pers​pekt​ivy-​agrarn​ogo-​ekspo​rta/​; T. G. Nefëdova, “Agropromyshlennaia kontsentratsiia v rossiiskikh regionakh,” EKO 4 (2014): 64–​82; Aleksei Makurin, “Ch’ia v Rossii zemlia? Samye krupnye sel’khozugod’ia—​v rukakh agrooligarkhov,” Argumenty i fakty, no. 22, May 29, 2019. 113. See the interview with Chemezov by RBK, September 16, 2019, https://​www.rbc.ru/​interv​ iew/​polit​ics/​16/​09/​2019/​5d78c​fca9​a794​7a69​4099​758. 114. Åslund, Russia’s Crony Capitalism, 127. In August 2022, dissatisfied with Chemezov’s management of the Rostekh holding company, Putin moved to remove him. Russian experts linked Chemezov’s demise to the fact that he had long advocated for a more open, trade-​ oriented relationship between Russian industry and the West, rather than autarky. The shift to a closed, mobilization-​oriented regime after Russia’s invasion of Ukraine put Chemezov at odds with Putin’s new course. 115. Åslund, Russia’s Crony Capitalism, 108–​114. 116. For example, a recent oil spill by the Lukoil extracting operation in the Komi Republic resulted in a massive flow of oil into the Arctic region. The same compnay has caused hundreds of oil spills over the past decades, resulting in significant environmental damage. Because the enterprise is so important to the regional economy, fines levided by the regional government have been nominal. Cf. Tat’iana Britskaia, “Chernyi led,” Novaia gazeta, May 19, 2021, https://​novay​agaz​eta.ru/​artic​les/​2021/​05/​18/​cher​nyi-​led. 117. Svetlana Romanova, “U rossiiskikh gendirektorov zarplaty i premii vyshe, chem u britanskikh-​ SpencerStuart,” Vedomosti, August 31, 2016; Anastasiia Bashkatova, “Otechestvennye top-​ menedzhery bogache amerikanskikh,” Nezavisimaia gazeta, September 2, 2016. 118. Åslund, Russia’s Crony Capitalism, 114. 119. “ sravnil istochniki dokhodov rukovodstva krupneishikh rossiiskikh kompanii,” Lenta.ru, August 12, 2015 https://​lenta.ru/​news/​2015/​08/​12/​inc​ome/​. 120. Liudmila Podobedova and Nataliia Telegina, “Sechin ob”iasnil neobkhodimost’ vysokikh zarplat v ,” RBK, June 15, 2016, http://​www.rbc.ru/​busin​ess/​15/​06/​2016/​ 57613​4449​a794​71b9​396e​b6f; “ ‘Rosneft’’ raskryla zarplatu Igoria Sechina,” May 5, 2015, http://​www.bbc.com/​russ​ian/​rus​sia/​2015/​05/​15050​5_​se​chin​_​sal​ary_​rosn​eft; Elena Berezanskaia, “Kto v Rossii poluchaet samuiu bol’shuiu zarplatu,” Forbes.ru, November 19, 2012, http://​www.for​bes.ru/​sobyt​iya/​rat​ing/​kompa​nii/​211​481-​gos​udar​evy-​slugi-​kto-​v-​ ros​sii-​poluch​aet-​sam​uyu-​bolsh​uyu-​zarpl​atu. 121. An example is the relationship between the copper-​producing company RMK (Russian Copper Company) in Chelyabinsk with the regional government. Founded in 2004 by two Cyprus shell companies and a Chelyabinsk entrepreneur, Igor’ Altushkin, the company is now the third largest copper-​producing company in Russia. It has grown by acquiring several dozen other mining and metallurgy companies in Russia and Kazakhstan. Altushkin himself ranks 25th on the Russian Forbes list with an estimated fortune in 2019 of $4.3 billion. The firm cultivates an image of a socially responsible corporation throughout the Urals region, for example donating computers to schools, building a sports stadium, and providing PPE for hospitals during the Covid-​19 pandemic, but the profits flow offshore. The company is deeply intertwined with the Chelyabinsk regional government, sponsoring several representatives in the national and regional legislatures and regularly supplying the regional government with senior officials and hiring them after they leave office. The Chelyabinsk regional ministry of environmental protection is a former senior manager of the company; the former chief federal inspector for the region became an adviser to the president of the company. The company enjoys a privileged status not only in the Chelyabinsk region, where it has proven itself invulnerable to legal challenges to the environmental pollution its extracting and smelting operations produce, but at the national level as well. The

 



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company’s new ore-​enrichment plant has been included in the national development plan for nonferrous metallurgy. RMK illustrates a common pattern in the alliance of dominant corporations with government: it generates profits through natural resource exploitation, absorbing potential rivals and ignoring environmental regulations. Although the region is one of the most polluted in the country, the company generates high profits that enrich the owners and senior executives of the company and are capitalized outside the country. 122. Iuliia Latynina, “’Oni udaviatsia za 50 kopeek,’ ” Novaia gazeta, October 23, 2020, https://​ novay​agaz​eta.ru/​artic​les/​2020/​10/​23/​87652-​latyn​ina. After a public outcry over the holdups in the supply of medications during a pandemic, the company announced that it would relax the rules somewhat, allowing the suppliers and retailers simply to notify the company of the sale. “V Rossii uprostiat markirovku lekarstv do gotovnosti uchastnikov rynka,” Kommersant, October 27, 2020. 123. This perspective underlies the field of institutional economics. Cf. Douglass C. North, Institutions, Institutional Change and Economic Performance (Cambridge: Cambridge University Press, 1990). 124. Blasi, Kroumova, and Kruse, Kremlin Capitalism; Michael McFaul, “State Power, Institutional Change, and the Politics of Privatization in Russia,” World Politics 47 (1995): 210–​243. 125. Gabriel Zucman, “Global Wealth Inequality,” Annual Review of Economics 11 (2019): 109–​138. 126. Åslund, Russia’s Crony Capitalism; Dawisha, Putin’s Kleptocracy; Catherine Belton, Putin’s People: How the KGB Took Back Russia and Then Took on the West (New York: Farrar, Straus and Giroux, 2020). 127. Compared with other countries, the returns to education are declining and are especially low for the vocational education system. Russian firms spend far less on training and retraining than do Western firms, and Russian workers individually go through continuing education or self-​education at a far lower rate. As a result, the value of education to both individual and society quickly deteriorates after a few years of employment. The low investment in education and skill formation beyond the initial degree also helps explain why total factor productivity tends to be low. Likewise, the share of produced capital—​machinery, equipment, urban land—​in total national wealth, measured on a per capita basis, is only one-​quarter of the OECD average. On the other hand, the share of natural resource wealth in the form of nonrenewable resources is far higher than in other upper and upper-​middle income states outside the Persian Gulf. Harry A. Patrinos and Suhas Parandekar, “The Educated Russian’s Curse: Returns to Education in the Russian Federation since the 1990s,” World Bank Blog, October 1, 2020, https://​blogs.worldb​ank.org/​educat​ion/​educa​ted-​russi​ans-​curse-​retu​ rns-​educat​ion-​russ​ian-​fed​erat​ion-​1990s; Vladimir E. Gimpel’son et al., “Proizvoditel’nost’ truda i rossiiskii chelovecheskii kapital: paradoksy vzaimisviazi: Doklad NIU VShE,” Vysdhaia shkola ekonomiki—​XXII aprel’skai mezhduranodnaia konferentsiia, 2021; Ekaterina Shokhina, “Uchenye nazvali prichinu nizkoi proizvoditel’nosti truda v Rossii,” Vedomosti, May 20, 2021; Esther Naikal, Olga Emelyanova, Vladislava Nemova, et al., How Wealthy Is Russia: Measuring Russia’s Comprehensive Wealth from 2000–​2017 (Washington, DC: World Bank Group, 2019). 128. Dmitrii Prokof ’ev, “Esh’ bednykh,” Novaia gazeta, May 4, 2021, https://​novay​agaz​eta.ru/​ artic​les/​2021/​05/​04/​esh-​bedn​ykh?utm​_​sou​rce=​tg&utm​_​med​ium=​nov​aya&utm_​c​ampa​ ign=​v-​str​ane-​nastup​aet-​novyy-​zas​toy—​govo​rit. 129. Many studies have detailed this progression. Among them are Michael McFaul, From Cold War to Hot Peace: An American Ambassador in Putin’s Russia (New York: Mariner Books, 2019); Timothy Frye, Weak Strongman: The Limits of Power in Putin’s Russia (Princeton, NJ: Princeton University Press, 2021); Regina Smyth, Elections, Protest, and Authoritarian Regime Stability: Russia 2008–​2020 (New York: Cambridge University Press, 2020); Alexander Baturo and Johan A. Elkink, The New Kremlinology: Understanding Regime Personalization in Russia (New York: Oxford University Press, 2021). 130. On the protests and the composition of the protesters, see Smyth, Elections, Protest. 131. Vladimir Putin, “On the Strategy of Development of Russia to 2020,” February 8, 2008, http://​presid​ent.krem​lin.ru/​text/​appe​ars/​2008/​02/​159​528.shtml.

 

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132. Vladimir Putin, “Spravedlivoe obustroistvo obshchestva, ekonomiki—​glavnoe uslovie nashego ustoichevogo razvitiia v eti gody,” Komsomol’skaia pravda, Febrary 13, 2012; Oleg Sukhov, “Putin Says Wealth Gap Is Unacceptable,” Moscow Times, July 18, 2012. 133. V. A. Mau and Ya. I. Kuz’minov, eds., Strategiia-​2020: Novaia model’ rosta—​novaia sotsial’naia politika: Itogovyi doklad o rezul’tatakh ekspertnoi raboty po aktual’nym problemam sotsial’no-​ ekonomicheskoi strategii Rossiii na period do 2020 g (Moscow: Delo, 2013), 317, https://​ www.hse.ru/​data/​2013/​11/​08/​128​2093​572/​%D0%A1%D1%82%D1%80%D0%B0%D1 %82%D0%B5%D0%B3%D0%B8%D1%8F-​2020_​%D0%9A%D0%BD%D0%B8%D0%B 3%D0%B0%201.pdf. 134. Quoted in RFE/​RL Newsline, April 25, 2005. 135. “Poslanie Prezidenta Federal’nomu Sobraniiu,” April 21, 2021, http://​krem​lin.ru/​eve​nts/​ presid​ent/​news/​65418. 136. David Apter, The Politics of Modernization (Chicago: University of Chicago Press, 1965); Remington, Building Socialism. 137. Anton Troianovsky, “Putin Aims to Shape a New Generation of Supporters, through Schools,” New York Times, July 16, 2022; Robyn Dixon, “Putin Seeks to Militarize School Children and Censor Textbooks amid War,” Washington Post, June 11, 2022. 138. In an official statement in July 2021, Putin laid out an argument that the Ukraine is rightfully part of Russia, having been artificially created by the Bolshevik Revolution and then preserved as an indepdent state by Western countries seeking to weaken and encircle Russia: “Ob istoricheskom edinstve russkikh i ukraintsev,” Kremlin.ru, July 12, 2021, http://​ www.krem​lin.ru/​eve​nts/​presid​ent/​news/​66181. 139. Barrington Moore Jr., Social Origins of Dictatorship and Democracy: Lord and Peasant in the Making of the Modern World (Boston: Beacon Press, 1966), 447. 140. Snyder, The Road to Unfreedom, 98–​100. The Economist noted a number of characteristic features of fascism in the regime at present: the preoccupation with homosexuality and the traditional family; the cult of personality around Putin; and the glorification of the state. “Russia Is In Thrall to a Distinctive Brand of Fascism,” The Economist, July 28, 2022. 141. The “Golden Billion” fantasy, invented by a Russian writer in a 1994 book and popularized by ultra-​nationalists, holds that a conspiratorial group of Western elites will save one billion people from the earth when the earth becomes severely overpopulated. They will then take over Russia, with its vast land and natural resources, and destroy the Russian population. Eliot Borenstein, Plots against Russia: Conspiracy and Fantasy after Socialism (Ithaca, NY: Cornell University Press, 2019).   President Putin himself made reference to it in a speech in July 2022, when he objected that: “this model of total domination of the so-​called golden billion is unfair. Why should this golden billion of all the population on the globe dominateover everyone and impose its own rules of behavior?” [It] “divides the world into first-​and second-​class people and is therefore essentially racist and neocolonial. . . . the underlying globalist and pseudo-​liberal ideology is becoming increasingly more like totalitarianism and is restraining creative endeavor and free historical creation.”   Adam Taylor, “The Apocalyptic Vision behind Putin’s ‘Golden Billion’ Argument,” Washington Post, July 22, 2022. 142. This was a key premise of the Freiburg school of ordoliberals, whose ideas I discuss in Chapter 9. Cf. Walter Eucken and T. W. Hutchison, “On the Theory of the Centrally-​ Administered Economy: An Analysis of the German Experiment, Parts I and II, Economica, new series, 15, no. 58 (May 1948); and 15, no. 59 (August 1948): 173–​193. Eucken and his colleagues argued both before the war and afterward that a market economy needed to preserve competition and the market mechanism for allocating resources, to which both an economy dominated by concentrated private economic power and state power was inimical. 143. Snyder, The Road to Unfreedom. 144. These associations have been extensively documented. Wealthy cronies of President Putin cultivated Paul Manafort, Roger Stone, Rudy Giuliani, and a number of other Trump advisers, and helping fund the operation to win Trump the nomination and election, then after the election, helped finance the campaign to discredit the US ambassador to Ukraine and the Ukrainian government. Three individuals tied to Russian intelligence agencies

 



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participated in the late-​night December 2020 White House meeting where Trump sought ways to stay in office despite having lost the election. See Robert S. Mueller III, “Report on the Investigation into Russian Interference in the 2016 Presidential Election,” U.S. Department of Justice, March 2019; Carole Cadwalladr and Emma Graham-​Harrison, “Cambridge Analytica: Links to Moscow Oil Firm and St. Petersburg University,” Guardian, March 17, 2018; Peter Strzok, “In One Oval Office Meeting, a Triple Russian Threat,” Washington Post, July 22, 2022; 145. Ed Caesar, “The FinCen Files Shed a New Light on a Scandalous Episode at Deutsche Bank,” New Yorker, September 22, 2020; David Enrich, Dark Towers: Deutsche Bank, Donald Trump, and an Epic Trail of Destruction (New York: Custom House, 2020). 146. “Powerful ‘Putin’s Chef ’ Prigozhin Cooks Up Murky Deals,” BBC, November 4, 2019. 147. Neil MacFarquhar, “Yevgenii Prigozhin, Russian Oligarch Indicted by U.S., Is Known as ‘Putin’s Cook,” New York Times, February 16, 2018; Marwa Eltagouri, “The Rise of ‘Putin’s Chef,’ the Russian Oligarch Accused of Manipulating the U.S. Election,” Washington Post, February 17, 2018; Mikhail Maglov, Timur Olevsky, and Dmitry Treshchanin, “Investigation Charts Massive Haul for State Deals by Companies Linked to ‘Putin’s Chef,” RFE/​RL, February 27, 2019. On the Wagner group’s activities in Ukraine, see Mary Ilyushina, “In Ukraine, a Russian Mercenary Group Steps out of the Shadows,” Washington Post, August 18, 2022. A Russian soldier who fled Russia after fighting in Ukraine and becoming disenchanted with the war discusses his observations of the Wagner group’s role in the war in an interview with a Russian-​language online publication in August 2022. See Farida Kurbangaleeva, “ ‘Esli rossiiskoe obshchestvo ne nachnet chto-​to delat', my poluchim iadernuiu voinu.’ Kontraktnik Pavel Filat'ev, voevavshii v Ukraine, a proiskhodiashchem na fronte, mysliashchikh soldat i sostoianii armii,” Republic, August 26, 2022 https://​repub​lic. ru/​posts/​104​980.   On Prigozhin’s recruitment efforts in prisons, see Pjioter Sauer, “‘We Thieves and Killers are Now Fighting Russia’s war’: How Moscow Recruits from Its Prisons,” The Guardian, September 20, 2022; Christiaan Triebert, “Video Reveals How Russian Mercenaries Recruit Inmates for Ukraine War,” New York Times, September 16, 2022.   Reports by the Germany-​based Russian NGO, “Russia Behind Bars,” (Rus’ sidiashchaia) indicate that men are eager to sign up to fight in the war as a way to get out of prison. 148. Peter Whoriskey, “Three Dozen Tycoons Met Putin on Invasion Day. Most Had Moved Money Abroad,” Washington Post, May 3, 2022. 149. “The ‘Cowboy Cocktail’: How Wyoming Became One of the World’s Top Tax Haven,” Washington Post, December 22, 2021. 150. Fiona Hill, There Is Nothing for You Here: Finding Opportunity in the 21st Century (New York: Mariner Books, 2021), p. 193.

Chapter 8 1. Susan Shirk, The Political Logic of Economic Reform in China (Berkeley: University of California Press, 1993); Minxin Pei, China’s Trapped Transition (Cambridge, MA: Harvard University Press, 2008); Yingyi Qian, Gerard Roland, and Chenggang Xu, “The Process of China’s Market Transition (1978–​1998): The Evolutionary, Historical, and Comparative Perspectives,” Journal of Institutional and Theoretical Economics 156, no. 1 (2000): 151–​171; Mark Harrison and Debin Ma, Soaring Dragon, Stumbling Bear: China’s Rise in a Comparative Context, CAGE-​Chatham House Series (Warwick, UK: Centre for Comparative Advantage in the Global Economy, 2013); Dali Yang, Remaking the Chinese Leviathan: Market Transition and the Politics of Governance in China (Stanford, CA: Stanford University Press, 2004); Chenggang Xu, “The Fundamental Institutions of China’s Reforms and Development,” Journal of Economic Literature 49 (2011): 1076–​1151; Isabella M. Weber, How China Escaped Shock Therapy: The Market Reform Debate (New York: Routledge, 2021). 2. Isabella M. Weber, “How to Make a Miracle? Ludwig Erhard’s Post-​war Price Liberalisation in China’s 1980s Reform Debate,” New School for Social Research Working Paper 03/​2019, March 2019, 18.

 

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3. Sebastian Heilmann, “Policy Experimentation in China’s Economic Rise,” Studies in Comparative International Development 43 (2008): 1–​ 26; Sebastian Heilmann, “From Local Experiments to National Policy: The Origins of China’s Distinctive Policy Process,” China Journal 59 (2008): 1–​30; Sebastian Heilmann and Elizabeth J. Perry, “Embracing Uncertainty: Guerrilla Policy Style and Adaptive Governance in China,” in Mao’s Invisible Hand, ed. Sebastian Heilmann and Elizabeth J. Perry (Cambridge, MA: Harvard University Press, 2011), 1–​29. 4. Jeffrey Sachs and Wing Thye Woo have forcefully argued that the contrast between Russian-​ style radical economic reform and Chinese gradualism is misleading due to the sharp differences in the starting conditions of the two countries. Cf. Jeffrey Sachs and Wing Thye Woo, “Structural Factors in the Economic Reforms of China, Eastern Europe, and the Former Soviet Union,” Economic Policy 9 no. 18 (April 1994): 101–​145; Wing Thye Woo, “The Art of Reforming Centrally Planned Economies: Comparing China, Poland, and Russia,” Journal of Comparative Economics 18 (1994): 276–​308. 5. Thomas F. Remington, “Institutional Change in Authoritarian Regimes,” Problems of Post-​ communism 66, no. 5 (2018): 302–​314; Sebastian Heilmann, Red Swan: How Unorthodox Policy-​ Making Facilitated China’s Rise (Hong Kong: Chinese University Press, 2018); Alexander Libman and Michael Rochlitz, Federalism in China and Russia: Story of Success and Story of Failure? (Cheltenham, UK: Edward Elgar, 2019). 6. Barry Naughton, Growing out of the Plan: Chinese Economic Reform, 1978–​ 1993 ((New York: Cambridge University Press, 1995). “Reform” meant permitting some production for profit on the part of farmers and small enterprises once state procurement targets were met, and “opening up” referred to a limited opening to foreign trade and investment, as well as the flow of ideas from outside the country. 7. Yasheng Huang, Capitalism with Chinese Characteristics: Entrepreneurship and the State (Cambridge: Cambridge University Press, 2008). 8. Naughton, Growing out of the Plan, 137–​151. 9. The “tax for profit” mechanism replaced the market-​based policy of setting a fixed quantity of profits that enterprises could retain with a standard tax rate, thus allowing enterprises to retain profits above that level. The regime then modified this with a system of negotiated tax rates. The latter represented a concession to powerful ministry and provincial government interests. See Shirk, Political Logic, 15. 10. Shirk, Political Logic, 288. 11. The Maoist faction was the wing in the Communist Party adhering to Mao Zedong’s Cultural Revolution militant ideology rejecting any opening to private property, profit, or economic competition—​ideas that the Maoists associated with “bourgeois” ideology.   Wing Thye Woo argues that Chinese gradualism was in fact the outcome of the impasse between the reformers, such as Deng, and the Stalinists, such as Chen Yun. The Stalinists employed the metaphor of the birdcage. The central plan was the cage. Without it the bird—​i.e., the economy—​would fly away, i.e., result in chaos. Swinging the cage sufficiently to create the illusion of market freedom was needed to keep the bird happy. Woo, “Art of Reforming.” 12. Ezra Vogel, Deng Xiaoping and the Transformation of China (Cambridge, MA: Harvard University Press, 2011), 390. 13. Naughton, Growing Out of the Plan; Vogel, Deng Xiaoping, 469–​471. 14. Vogel, Deng Xiaoping. 15. Bruce J. Dickson, Wealth into Power: The Communist Party’s Embrace of China’s Private Sector (New York: Cambridge University Press, 2008), 205. 16. Victor C. Shih, Factions and Finance in China: Elite Conflict and Inflation (New York: Cambridge University Press, 2008). 17. Zheng Lei, Benjamin L. Liebman, and Curtis J. Milhaupt, “SOEs and State Governance,” in Regulating the Visible Hand? The Institutional Implications of Chinese State Capitalism, ed. Benjamin L. Liebman and Curtis J. Milhaupt (New York: Oxford University Press, 2015), 203–​223. 18. X. L. Ding, “The Illicit Asset Stripping of Chinese State Firms,” China Journal 43 ( January 2000): 1–​28. 19. Lei, Liebman, and Milhaupt, “SOEs and State Governance.”

 



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20. Lei, Liebman, and Milhaupt, “SOEs and State Governance,” 209. 21. Lei, Liebman, and Milhaupt, “SOEs and State Governance,” 206. 22. Barry Naughton, The Chinese Economy: Adaptation and Growth, 2nd ed., MIT Press, 2018), 209. 23. Naughton, Growing out of the Plan, 234. 24. Nicholas R. Lardy, The State Strikes Back: The End of Economic Reform in China? (Washington, DC: Peterson Institute for International Economics, January 2019), 100–​112. 25. Naughton, The Chinese Economy, 335. 26. Saul Estrin and Martha Prevezer, “A Survey on Institutions and New Firm Entry: How and Why Do Entry Rates Differ in Emerging Markets?,” Economic Systems 34 (2010): 298. 27. Xiaoye Wang, The Evolution of Chinese Anti-​monopoly Law (Northampton, MA: Edward Elgar Publishing in association with Social Sciences Academic Press, 2014); Peijun Duan and Tony Saich, “Reforming China’s Monopolies,” Faculty Research Working Paper Series, RWP 14-​ 023, May 2014; Sheng Hong, “Shi longduan guoqi daozhi jingjizhi zhang” , SOE monopoly leads to economic stagnation], Financial Times Online, August 8, 2013. 28. Duan and Saich, “Reforming China’s Monopolies.” 29. Lardy, The State Strikes Back; Wendy Leutert, “Challenges Ahead in China’s Reform of State-​ Owned Enterprises,” Asia Policy 21 ( January 2016): 83–​99. 30. Gabriel Wildau, “China’s State-​Owned Enterprise Reform Plans Face Compromise,” Financial Times. September 14, 2015, https://​www.ft.com/​cont​ent/​5eeeb​84a-​5aaa-​11e5-​97e9-​7f0bf​ 5e71​77b. 31. Hon S. Chan, “Politics over Markets: Integrating State-​Owned Enterprises into Chinese Socialist Market,” Public Administration and Development 29 (2009): 53. 32. International Monetary Fund, The People’s Republic of China: Selected Issues, IMF Country Report no. 16.271 (Washington, DC: IMF, August 2016), 38. 33. Barry Naughton, “State Enterprise Reform: Missing in Action,” China Economic Quarterly 20 no. 2 ( June 2016): 16. 34. Lardy, The State Strikes Back, 101. 35. Wildau, “China’s State-​Owned Enterprise Reform”; Andrew Batson, “Villains or Victims? The Role of SOEs in China’s Economy,” China Economic Quarterly 20, no. 2 ( June 2016): 7–​14. 36. International Monetary Fund, People’s Republic of China, 38. 37. Andrew Szamosszegi and Cole Kyle, An Analysis of State-​Owned Enterprises and State Capitalism in China, (Washington, DC: U.S.-​ China Economic and Security Review Commission, October 26, 2011); cf. Clifford G. Gaddy and Barry W. Ickes, Russia’s Virtual Economy (Washington, DC: Brookings Institutions Press, 2002). 38. Yuen Yuen Ang, China’s Gilded Age: The Paradox of Economic Boom and Vast Corruption (New York: Cambridge University Press, 2020); Minxin Pei, China’s Crony Capitalism: The Dynamics of Regime Decay (Cambridge, MA: Harvard University Press, 2016); Andrew Wedeman, Double Paradox: Rapid Growth and Rising Corruption in China (Ithaca, NY: Cornell University Press, 2012); Andrew G. Walder, “Back to the Future? Xi Jinping as an Anti-​bureaucratic Crusader,” China 16, no. 3 (2018): 18–​34. A recent memoir by a top-​ level Chinese businessperson, now living abroad, details how entrepreneurs work tirelessly to cultivate and maintain close personal relations with top officials through favors. Desmund Shum, Red Roulette: An Insider’s Story of Wealth, Power, Corruption, and Vengeance in Today’s China (New York: Scribner, 2021). 39. Dickson, Wealth into Power, 199–​200; Wedeman, Double Paradox. 40. Bruce Dickson cites an internal Chinese report that found that 90% of billionaires were the children of high-​ranking officials. Dickson, Wealth into Power, 23. 41. Lizzi C. Lee, “Xi Jinping’s Graft Busters Are Probing Jack Ma’s Home City, and a Rising Star of Xi’s Zhejiang Clan,” SupChina, August 31, 2021, https://​supch​ina.com/​2021/​08/​31/​ xi-​jinpi​ngs-​graft-​bust​ers-​are-​prob​ing-​jack-​mas-​home-​city-​and-​a-​ris​ing-​star-​of-​x is-​zheji​ang-​ clan/​. 42. Lee, “Xi Jinping’s Graft Busters.” 43. Henny Sender, “Jack Ma vs. the Party: Inside the Collapse of the World’s Biggest IPO,” Nikkei Asia, November 18, 2020, https://​asia.nik​kei.com/​Spotli​ght/​The-​Big-​Story/​

 

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Jack-​Ma-​vs.-​the-​Party-​Ins​ide-​the-​colla​pse-​of-​the-​world-​s-​bigg​est-​IPO; https://​asia.nik​kei. com/​Spotli​ght/​The-​Big-​Story/​Jack-​Ma-​vs.-​the-​Party-​Ins​ide-​the-​colla​pse-​of-​the-​world-​s-​ bigg​est-​IPO. 44. Lingling Wei, “China Blocked Ant Group’s IPO after Investigation Revealed Likely Beneficiaries,” Wall Street Journal, February 16, 2021; Rui Ma and Ying Lu, “Ant Group IPO Thwarted,” November 10, 2020, https://​www.techbu​zzch​ina.com/​new​slet​t er/​sig​nup/​extra-​ buzz-​19-​ant-​group-​the-​bigg​est-​ipo-​that-​wasnt; Tom Mitchell, Ryan McMorrow, and Sun Yu, “Crackdown on Jack Ma’s Empire Gathers Pace Despite Reappearance,” Financial Times, January 22, 2021; Sender, “Jack Ma.” 45. Lingling Wei, “Ant IPO-​Approval Process under Investigation by Beijing,” Wall Street Journal, April 27, 2021; Lee, “Xi Jinping’s Graft Busters.” 46. The regime under Xi has used the enforcement of antimonopoly law as a weapon against such regionalism and local cronyism, among other objectives. The goal of weakening local protectionism is one of the reasons for the renewed push for stiff enforcement of antimonopoly rules against the large technology companies. See Thomas F. Remington, Jiwei Qian, and Svetlana Avdasheva, “Regulating Competition in the Digital Platform Economy: Russia and China,” Problems of Post-​communism, published online September 13, 2022, https://​doi.org/​ 10.1080/​10758​216.2022.2117​199. 47. Dickson, Wealth into Power; Kellee S. Tsai, Capitalism without Democracy: The Private Sector in Contemporary China (Ithaca, NY: Cornell University Press, 2007).. 48. https://​fort​une.com/​2016/​03/​03/​china-​natio​nal-​peop​les-​congr​ess-​alib​aba/​. 49. Melanie Manion, Corruption by Design: Building Clean Government in Mainland China and Hong Kong (Cambridge, MA: Harvard University Press, 2004); Xiabo Lü, “Booty Socialism, Bureau-​ Preneurs, and the State in Transition: Organizational Corruption in China,” Comparative Politics 32, no. 3 (2000): 273–​294. 50. Pei, China’s Crony Capitalism. 51. Pei, China’s Crony Capitalism, 36, 117. 52. Dickson, Wealth into Power, 221. 53. What the party gives, it can take away. Xi Jinping sent a strong signal to that effect when on November 3, 2020, the party suddenly denied the giant fintech firm Ant Group the right to go forward with its IPO on the Shanghai and Hong Kong Stock Exchanges. The IPO was expected to net $34 billion in sales. The move followed a speech by Alibaba’s CEO, Jack Ma, on October 24 criticizing excessive regulation of the financial industry. Inter alia, see Sender, “Jack Ma.” 54. Proposals for a property tax have been offered for years, but are never incorporated into the National People’s Congress plans for legislation. In late summer 2021, proposals for taxes on real estate, inherited estates, and other forms of wealth have again been floated as part of the slogan “common prosperity.” Cf. Li Shi and Yang Yixin, “Jianshe shouru fenpei zhidu gaige shiyan qu zhu tui gongtong fuyu” [Establish reform of the income distribution system by a pilot zone for common prosperity], August 19, 2021, http://​www.ce.cn/​xwzx/​gnsz/​gdxw/​ 202​108/​19/​t20​2108​19_​3​6821​588.shtml. 55. Wendy Wu, “How the Communist Party Controls China’s State-​Owned Industrial Titans,” South China Morning Post, June 17, 2017, http://​www.scmp.com/​news/​china/​econ​omy/​arti​ cle/​2098​755/​how-​commun​ist-​party-​contr​ols-​chi​nas-​state-​owned-​ind​ustr​ial-​tit​ans. 56. “Zuowei gongheguo zhangzi, women bu longduan shei longduan?” Southern People’s Weekly, July 24, 2009, http://​busin​ess.sohu.com/​20090​724/​n26​5453​162.shtml. 57. Minyan Gai, “Jingji xin changtai zhuanmai zhidu xia yancao ye xiaolü de fenxi” [An analysis of the economic efficiency of the tobacco industry under the new normal monopoly system], Xiàndài yíngxiāo (xìnxī bǎn) 10 (2019): 56–​57. 58. Qingjie Xia, Lina Song, Shi Li, and Simon Appleton, “The Effects of the State Sector on Wage Inequality in Urban China: 1988–​2007,” IZA DP ,o. 7142, January 2013. 59. Xia et al., “Effects of State Sector,” 4. 60. Xie Yu and Yongai Jin, “Household Wealth in China,” Chinese Sociological Review 47, no. 3 (2015): 203–​229. 61. Yu and Jin, “Household Wealth in China,” 224.

 



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62. Credit Suisse Research Institute, “Global Wealth Report,” 2019, https://​www.cre​dit-​sui​sse. com/​about-​us/​en/​repo​rts-​resea​rch/​glo​bal-​wea​lth-​rep​ort.html. 63. Kenneth S. Rogoff and Yuanchen Yang, “Peak China Housing,” NBER Working Paper 27697 August 2020. 64. Fulong Wu, Jie Chen, Fenghua Pan, Nick Gallent, and Fangzhu Zhang, “Assetization: The Chinese Path to Housing Financialization,” Annals of the American Association of Geographers 110, no. 5 (2020): 1483–​1499. 65. Wu et al., “Assetization,” 1490. 66. Rogoff and Yang, “Peak China Housing,” 10. 67. Real estate prices have been falling steadily beginning since summer 2021. A few developers have gone bankrupt. Since real estate assets were held as collateral by many banks and local government financial investment entities, the collapse of the real estate sector posed risks for the country’s financial system generally and left thousands of homebuyers who had put down payments on an unbuilt house without options.   See Sun Yu, “China’s Distressed Asset Funds Struggle to Profit from Collapsing Property Sector,” Financial Times, August 24, 2022, https://​www.sixtht​one.com/​news/​1011​071/​we-​ own-​it-​the-​chin​ese-​hom​eown​ers-​squatt​ing-​in-​unf​i nis​hed-​buildi​ngs?sou​rce=​chann​el_​h​ome. 68. Sociologist Yingyao Wang calls this pattern “collusion between the power of the state and the magic of finance.” Yingyao Wang, “The Rise of the ‘Shareholding State’: Financialization of Economic Management in China,” Socio-​economic Review 13, no. 3 (2015): 605. 69. Bloomberg News, “China Hidden Local Government Debt Is Half of GDP, Goldman Says,” Bloomberg News, September 29, 2021, https://​www.bloomb​erg.com/​news/​artic​les/​2021-​ 09-​29/​china-​hid​den-​local-​gov​ernm​ent-​debt-​is-​half-​of-​gdp-​gold​man-​says; Zhou Xin, “China Evergrande Is Not a Lehman Brothers Moment, but Its Fate Spells Trouble for Long-​Term Growth,” China Macro Economy, September 20, 2021, https://​www.scmp.com/​econ​omy/​ china-​econ​omy/​arti​cle/​3149​412/​china-​eve​rgra​nde-​not-​leh​man-​broth​ers-​mom​ent-​its-​fate-​ spe​lls. 70. Destin Jenkins, The Bonds of Inequality: Debt and the Making of the American City (Chicago: University of Chicago Press, 2022). 71. Naughton, Growing Out of the Plan. 72. Hu Heli and Zhong Pengrong, Gaige de xianshi yu zhanwang [Reform: Realities and perspectives] (Qingdao: Qingdao Publishing House, 1990). 73. Wan Anpei, “Zujin guimo de dong tai kaocha” [Inquiry into the trends in the scale of rents], Jingji yanjiu 2 (February 1995): 75–​80. 74. Quoted in Dickson, Wealth into Power, 51. 75. Sheng-​Wen PAN, “Countermeasures for Regulating Income Distribution in Monopoly Industries of China,” International Journal of Management Science and Engineering Research 1 (2014): 16–​20; Yun Dai, “Research on Influencing Factors of Executive Compensation in China’s Monopoly Industries,” Open Journal of Business and Management 2 (2014): 210–​ 218; Simon Rabinovitch, “Financial Times: China’s Bosses Criticized over High Pay,” CNN, April 28, 2013, https://​www.cnn.com/​2013/​04/​29/​busin​ess/​china-​bos​ses-​cri​tici​zed-​pay/​ index.html. 76. Yuen Yeuk-​laam, “SOE Executives Comment on Salary Cuts at Two Sessions Economic Forum,” Global Times, March 9, 2015, http://​www.glob​alti​mes.cn/​cont​ent/​910​904.shtml. 77. Yubo Li, Fang Lou, Jiwei Wang, and Hongqi Yuan, “A Survey of Executive Compensation Contracts in China’s Listed Companies,” China Journal of Accounting Research, September 2013, https://​www.scienc​edir​ect.com/​scie​nce/​arti​cle/​pii/​S17553​0911​3000​233. 78. https://​www.law.ox.ac.uk/​busin​ess-​law-​blog/​blog/​2017/​03/​beh​ind-​numb​ers-​state-​cap​ital​ ism-​and-​execut​ive-​compe​nsat​ion-​china%E2%80%99. 79. Blooomberg, “This Chinese Pork CEO Was Paid More Than Tim Cook or Elon Musk,” https://​www.bloomb​erg.com/​news/​artic​les/​2018-​05-​15/​this-​chin​ese-​ceo-​got-​paid-​more-​ than-​tim-​cook-​or-​lloyd-​blankf​ein, May 15, 2018. Wan Long, chairman and chief executive officer of WH Group, was the highest paid executive of a Hong Kong–​listed company with $291 million in salary and stock payments last year. 80. Hua Zhang, Yuanyang Song, and Yuan Ding, “What Drives Managerial Perks? An Empirical Test of Competing Theoretical Perspectives,” Journal of Business Ethics 13 (2015): 259–​275.

 

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81. Ginkgo Search Partners, “Executive Compensation in China: An Overview,” 2018, https://​ www.ginkg​osea​rch.com/​execut​ive-​compe​nsat​ion-​in-​china/​. 82. Hurun Research Institute, LEXUS·Hurun China Rich List 2019, release 2019-​10-​10, https://​ www.hurun.net/​EN/​Arti​cle/​Deta​ils?num=​CE084​72BB​47D. 83. Their calculation makes use of the Hurun Rich Lists to derive a Pareto coefficient for the incomes of the top segment of income-​earners, those above the top income threshold for incomes reported in China’s Household Income Survey (CHIP). They estimate that this group rose from around 0.28% of the population to around 7.68% between 2007 and 2013 and that the true Gini index for the China-​wide distribution of income in 2013 was 0.589 rather than the Gini coefficient calculated from the CHIPS survey of 0.414. This implies that the share of income not measured by CHIP was approximately 29%. They estimate that whereas the CHIP-​derived Gini fell slightly from 2007 to 2013, the recalculated Gini taking into account top-​end incomes rose from 0.494 to 0.583. All of the difference is accounted for by the concentration of income growth at the very highest end, where incomes are most hidden. Cf. Chuliang Luo, Terry Sicular, and Shi Li, “Overview,” in Changing Trends in China’s Inequality, ed. Terry Sicular, Shi Li, Ximing Yue, and Hiroshi Sato (New York: Oxford University Press, 2020), 67–​69. Also see the discussion in Ximing Yue, Shi Li, and Terry Sicular, “High Incomes in Monopoly Industries: A Discussion,” Social Sciences in China 32, no. 2 (2011): 178–​196. 84. Ximing Yue and Meng Cai, “A Study on High Incomes in China’s Monopoly Industries,” China Economist 11, no. 3 (May–​June 2016): 54–​63; Zhao Renwei, “Chapter 2. Increasing Income Inequality and Its Causes in China,” Chinese Economy 33, no. 4 ( July–​August 2000): 8–​27. 85. Ren Zhong and Zhou Yunbo, “Longduan dui woguo hangye shouru chaju de yingxiang daodi you duo da?” [How much does monopoly influence China’s industrial income gap?], Jingji lilun and jingji guanli [Economic theory and economic management] 4 (2009): 25–​30. 86. Yue, Li, and Sicular, “High Incomes ,” 182; Yuanyuan Zhang and Zhaohong Lin, “Hainan sheng chiye gongzi chayi de yanbian ji qi yingxiang yinsu de shizheng fenxi” [An empirical analysis of the evolution and factors influencing the Hainan provincial industrial wage gap], Zhongguo fazhan [China development] 14, no. 1 (2014): 41–​44. 87. YUE, Ximing, and CAI, Meng. “A Study on High Incomes in China’s Monopoly Industries.” China Economist 11, no. 3 (May–​June 2016): 54–​63.   The authors decompose the wages of comparable categories of employees in monopolized and competitive industries, based on age, sex, experience, education and occupation. They attribute the difference in the wage levels of comparable sets of workers between the two groups of industries to the monopoly rents extracted by the state-​owned firms. 88. Batson, “Villains or Victims”; Naughton, “State Enterprise Reform,” 15–​21. 89. Tsai, Capitalism without Democracy. 90. Chunling Li, “The Heterogeneous Composition and Multiple Identities of China’s Middle Class,” in Handbook on Social Stratification in the BRIC Countries: Change and Perspective, ed. Peilin Li, M. K. Gorshkov, Celi Scalon, and K. L. Sharma (Singapore: World Scientific, 2013), 401. 91. Rory Truex, “The Returns to Office in a ‘Rubber Stamp’ Parliament,” American Political Science Review 108, no. 2 (May 2014): 235–​251; Dickson, Wealth into Power. 92. Barry Naughton, Growing out of the Plan: Chinese Economic Reform, 1978–​ 1993 ((New York: Cambridge University Press, 1995); Naughton, The Chinese Economy. 93. Xiaolu Wang, “Grey Income and Income Inequality,” Credit Suisse, Analysing Chinese Grey Income, August 6, 2010; Xiaolu Wang and Wing Thye Woo, “The Size and Distribution of Hidden Household Income in China,” Asian Economic Papers 10, no. 1 (2011): 1–​26. 94. Wang, “Grey Income.” 95. Pei, Crony Capitalism; Wedeman, Double Paradox; Ang, Gilded Age. 96. Chen Guangjin, “Structural Characteristics and Trends of Income Inequality in China,” in Handbook on Social Stratification in the BRIC Countries: Change and Perspective, ed. Peilin Li, M. K. Gorshkov, Celi Scalon, and K. L. Sharma (Singapore: World Scientific, 2013), 481–​498. 97. Li, “Heterogeneous Composition.”

 



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98. Li Peilin, “Zhongguo kua yue ‘zhong deng shou ru xian jing’ de lujing xuanze” [China’s choice of paths in escaping the middle income trap], in Zhong guo he Eluosi de zhong deng shou ru qun ti: Yingxiang he qushi [Middle-​class groups in China and Russia: Influences and tendencies], ed. Li Peilin and Mikhail Gorshkov (Beijing: Shehui kexue wenxian chuban she, 2018), 9. 99. Björn Gustafsson, Terry Sicular, and Xiuna Yang, “China’s Emerging Global Middle Class,” in Changing Trends in China’s Inequality, ed. Terry Sicular, Shi Li, Ximing Yue, and Hiroshi Sato (New York: Oxford University Press, 2020), 75–​108. 100. Li Peilin, “Zhong guo kuayue shuangchong ‘zhong deng shouru xianjing’ de lu jing xuanze” [China’s choice of paths in jumping over the double middle-​income trap], in Li Peilin; Ge’ershenkefu deng/​shu [Li Pelin and Mikhail Gorshkov, et al.], Zhong guo he Eluosi de zhong deng shou ru qun ti: Yingxiang he qushi [China and Russia’s middle class groups: influences and trends], (Beijing: Shehui kexue wenxian chuban she, 2018), 13. 101. Ang, China’s Gilded Age; Tsai, Capitalism without Democracy; Wedeman, Double Paradox. 102. Thomas F. Remington, “Why Is Interregional Inequality Not Falling in Russia and China?,” Communist and Post-​communist Studies 46, no. 1 (2015): 1–​13. 103. Natal’ia Zubarevich, “Moskovskaia sistema,” Polit.ru, February 2, 2012. 104. Chapter 2, above, explains the economic theory of convergence. 105. Remington, “Why Is Interegional Inequality Not Falling?” 106. Nataliia Zubarevich, “Chetyre Rossii i novaia politicheskaia real’nost’,” Polit.ru, January 17, 2016. 107. Nataliia Zubarevich, “Regiony-​dolzhniki. Mezhdu Scylloi I Kharibdoi,” Polit.ru, November 14, 2017; Nataliia Zubarevich, “Regional’naia proektsiia novogo rossiiskogo krizisa,” Voprosy ekonomiki 4 (April 2015): 37–​52; Nataliia Zubarevich and S. G. Safronov, “Regional Inequality in Large Post-​Soviet Countries,” Regional Research of Russia 1, no. 1 (2011): 15–​ 26; Nataliia Zubarevich, “Razvitie i neravenstvo: prostranstvennyi rakurs,” Polit.ru, February 25, 2015. 108. http://​www.isss.pku.edu.cn/​cfps/​en/​index.htm. China Family Panel Studies (CFPS) is a nationally representative, annual longitudinal survey of Chinese communities, families, and individuals launched in 2010 by the Institute of Social Science Survey of Peking University, China. The CFPS is designed to collect individual-​, family-​, and community-​level longitudinal data in contemporary China. The studies focus on the economic, as well as the noneconomic, well-​being of the Chinese population, with a wealth of information covering such topics as economic activities, education outcomes, family dynamics and relationships, migration, and health. The CFPS is funded by the Chinese government through Peking University. 109. https://​www.scmp.com/​econ​omy/​china-​econ​omy/​arti​cle/​3132​980/​china-​pop​ulat​ion-​lat​ est-​cen​sus-​confi​rms-​incre​ase-​1412-​bill​ion. 110. Scott Rozelle and Natalie Hell, Invisible China: How the Urban-​Rural Divide Threatens China’s Rise (Chicago: University of Chicago Press, 2020), 78–​79. 111. Feng Wang, Boundaries and Categories: Rising Inequality in Post-​socialist Urban China (Stanford, CA: Stanford University Press, 2008); Fei-​Ling Wang, Organizing through Division and Exclusion (Stanford, CA: Stanford University Press, 2005); Naughton, The Chinese Economy. 112. Lu Zhang, “The Paradox of Labor Force Dualism and State-​Labor-​Capital Relations in the Chinese Automobile Industry,” in From Iron Rice Bowl to Informalization: Markets, Workers, and the State in a Changing China, ed. Sarosh Kuruvilla, Ching Kwan Lee, and Mary E. Gallagher (Ithaca, NY: ILR Press /​Cornell University Press, 2011), 107–​137. 113. in Shi Li, Hiroshi Sato, and Terry Sicular, eds., Rising Inequality in China: Challenges to a Harmonious Society (Cambridge: Cambridge University Press, 2013), 67; Terry Sicular, Shi Li, Ximing Yue, and Hiroshi Sato, eds., Changing Trends in China’s Inequality (New York: Oxford University Press 2020). 114. Sicular et al., Changing Trends. 115. Yi Fan, Junjian Yi, and Junsen Zhang, “Rising Intergenerational Income Persistence in China,” American Economic Journal: Economic Policy 13, no. 1 (2021): 202–​230. 116. Mai Lu, ed., The Chinese Dream and Ordinary Chinese People (New York: Springer, 2021).

 

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117. Jane Golley and Sherry Tao Kong, “Inequality of Opportunity in China’s Educational Outcomes,” China Economic Review (2016): 116–​128; Jane Golley and Sherry Tao Kong, “Inequality in Intergenerational Mobility of Education in China,” China & World Economy 21, no. 2 (2013): 15–​37. 118. Golley and Kong, “Inequality in Intergenerational Mobility,” 15. 119. Rozelle and Hell, Invisible China, 77. 120. Rozelle and Hell, Invisible China, 108. 121. Rozelle and Hell, Invisible China. 122. Michael Wines, “An Ambitious Chinese Party Chief Admits His Failure to Oversee an Aide,” New York Times, March 9, 2012. 123. “China to Take Further Steps to Address Income Gap: Wen,” China Daily, March 14, 2012. 124. Barry Naughton estimates that China’s Gini index reached 0.447 by 2001. Yasheng Huang cites a Chinese Academy of Social Sciences estimate for 2006 of 0.496. Yu Xie and Xiang Zhou report that the Gini index was in the range of 0.53–​0.55 in 2010. Xiaolu Wang and Wing Thye Woo estimated that the Gini coefficient was probably “much higher” than 0.47–​0.50 in 2010. A team of scholars from the Southwestern University of Finance and Economics estimated on the basis of a national household finance survey that the Gini index stood at 0.61 in 2010. Yu Xie and Xiang Zhou report that the Gini index was in the range of 0.53–​0.55 in 2010. Xiaolu Wang and Wing Thye Woo estimated that the Gini coefficient was probably “much higher” than 0.47–​0.50 in 2010. Naughton, The Chinese Economy, 218; Huang, Capitalism with Chinese Characteristics, 256; “Report of China Household Income Disparity, Survey and Research Center for China Household Finance (SWUFE),” Frontiers of Economics in China 8, no. 3 (2013): 452–​466; Yu Xie and Xiang Zhou, “Income Inequality in Today’s China,” PNAS 111, no. 19 (May 13, 2014): 6928; Wang and Woo, “Size and Distribution.” 125. Shi Li, Hiroshi Sato, and Terry Sicular, “Rising Inequality in China: Key Issues and Findings,” in Rising Inequality in China: Challenges to a Harmonious Society, ed. Shi Li, Hiroshi Sato, and Terry Sicular (Cambridge: Cambridge University Press, 2013); Sicular et al., Changing Trends. 126. Luo, Sicular, and Li, “Overview,” 67–​69. 127. Luo, Sicular, and Li, “Overview.” 128. Qin and Riskin, “Market versus Social Benefits,” 20–​36. 129. Dorothy J. Solinger and Yiyang Hu, “Welfare, Wealth and Poverty in Urban China: The Dibao and Its Differential Disbursement,” unpublished paper, University of California, Irvine, 2011. 130. Strategiia-​ 2020: Novaia model’ rosta—​ novaia sotsial’naia politika: Itogovyi doklad o rezul’tatakh ekspertnoi raboty po aktual’nym problemam sotsial’no-​ekonomicheskoi strategii Rossiii na period do 2020 g (hereafter Strategy 2020), 322. 131. Strategy 2020, 322. 132. Shuanglin Lin, “Tax Reforms in China and Russia,” Chinese Economic Studies 42, no. 3 (2009): 24–​40; Hua Xu and Huiyu Cui, “Personal Income Tax Policy in China and the United States: A Comparative Analysis,” Public Administration Review, December 2009, S75; Russian State Tax Service, http://​www.nalog.ru/​fl/​docs/​3856​626/​print/​, accessed July 5, 2012; http://​www.nalog.ru/​fl/​docs/​3856​626/​print/​. In the United States, the personal income tax generates over 40% of federal tax revenues. 133. Strategy 2020, 144–​145. 134. Lin, “Tax Reforms in China and Russia.” 135. Xu and Cui, “Personal Income Tax Policy.” 136. Martin King Whyte, Myth of the Social Volcano: Perceptions of Inequality and Distributive Injustice in Contemporary China (Stanford, CA: Stanford University Press, 2010); Martin King Whyte and Dong-​Kyun Im, “Is the Social Volcano Still Dormant? Trends in Chinese Attitudes toward Inequality,” Social Science Research 48 (2014): 62–​76. 137. Ya-​Wen Lei, “Revisiting China’s Social Volcano: Attitudes toward Inequality and Political Trust in China,” Socius: Sociological Research for a Dynamic World 6 (2020): 1–​21.

 



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138. Minxin Pei, “The Origins and Implications of Xi Jinping’s ‘Common Prosperity’ Agenda,” China Leadership Monitor 70 (Winter 2021), https://​3c831​4d6-​0996-​4a21-​9f8a-​a63a5​ 9b09​269.files​usr.com/​ugd/​af1ede_​add02​de5a​9344​ff2b​375c​37ad​078d​28b.pdf. 139. “Zhonggong zhongyang guowuyuan guanyu zhichi zhejiang gao zhiliang fazhan jianshe gongtong fuyu shifan qu de yijian,” [Opinion of the Central Committee of the CCP and the State Council on supporting high-​quality development in Zhejiang and building a demonstration zone for shared prosperity], June 10, 2021, http://​www.gov.cn/​zhen​gce/​2021-​06/​ 10/​cont​ent_​5616​833.htm. 140. Amber Wang, “China’s Top Security Official Touts Common Prosperity Campaign, Points to ‘Hidden Peril’ of Wealth Gap,” South China Morning Post, November 30, 2021. 141. Chen Yikan, “Jiemi bufen gao shouru zhe tou taoshui shoufa shuiwu jianguan chixu jiaqiang” [Exposing the means by which some high-​income people conceal their income, continuing to strengthen tax supervision], China Business News, November 29, 2021, https://​baijia​hao. baidu.com/​s?id=​1717​7837​8259​4952​175&wfr=​spi​der&for=​pc. 142. http://​www.xinhua​net.com/​polit​ics/​2021-​08/​29/​c_​112​7807​097.htm. The reference to masculine cultural imagery alludes to the frequent complaint about the prominence of androgenous styles of self-​presentation (sometimes called “sissy-​boy” styles [jingzhunan or simply jingnan, i.e., refined pig boys or refined boys]) on the part of some male entertainment industry figures. This fad became the target of heated cultural criticism in recent years for its violation of traditional gender role stereotypes. Under the current crackdown commercial, ads and television programs may not use such images. It is noteworthy that, as in Russia, the anti-​Western rhetoric appeals to a traditional notion of gender roles as part of the support for a firm and authoritarian style of rule. In the same spirit, ultraconservative Americans inveigh against “unmanly liberalism” (cited in Marc Fisher and Isaac Stanley-​Becker, “The Claremont Institute Triumphed in the Trump Years. Then Came Jan. 6,” Washington Post, July 24, 2022). 143. Wenxin Fan, “Chinese Essayist Revives Worries about a New Cultural Revolution,” Wall Street Journal, September 3, 2021; Jun Mai and Guo Rui, “Viral Blogger Hailed China’s ‘Profound Revolution’, but the State May Disagree,” South China Morning Post, September 3, 2021. 144. Ibid. 145. Ibid. 146. Zhang Jun, “Gong fu hui xiaochu shouru chabie, dan ke baozhang diceng timian shenghuo,” [Common prosperity will not eliminate income differences, but it will guarantee a decent life], Fudan Development Institute https://​fddi.fudan.edu.cn/​15/​20/​c18965​a398​624/​ page.htm#:~:text=​8%E6%9C%8817%E6%97%A5%E5%8F%AC%E5%BC%80,%E7% 9A%84%E6%A9%84%E6%A6%84%E5%9E%8B%E5%88%86%E9%85%8D%E7%BB% 93%E6%9E%84%E3%80%82&text=​%E5%85%B1%E5%90%8C%E5%AF%8C%E8%A3 %95%E6%98%AF%E5%90%A6%E5%B0%B1%E6%98%AF%E6%B6%88%E9%99%A4 %E6%94%B6%E5%85%A5%E5%B7%AE%E5%88%AB%EF%BC%9F. 147. For example, see the spate of articles in Caixin Global explaining that “common prosperity” does not mean “robbing the rich to give to the poor” and that it is an encouragement to more “tertiary distribution.” For example, Cai Xuejiao, “’Robbing the Rich’ Is Not Part of China’s Plan for ‘Common Prosperity,’ Official Says,” Caixin Global, August 26, 2021; Wang Tao, “What Does ‘Common Prosperity’ Mean for China’s Policies and Economy?,” Caixin Global, August 27, 2021; Kevin Guo, “CX Daily: What’s Standing in the Way of ‘Common Prosperity’?,” Caixin Global, September 10, 2021, https://​www.caixi​nglo​bal. com/​2021-​09-​10/​cx-​daily-​whats-​stand​ing-​in-​the-​way-​of-​com​mon-​pro​sper​ity-​101771​292. html; “Editorial: Releasing the Potential of Tertiary Distribution,” Caixin Global, August 23, 2021, https://​adva​nce-​lexis-​com.ezp-​prod1.hul.harv​ard.edu/​docum​ent/​?pdm​fid=​ 1516​831&crid=​ 3 b2d8​ 0 b9-​ 2 53e-​ 4 bf0-​ a 656-​ 9 0ef4​16dd​531&pddocf ​u llp​ath=​% 2Fsha​ red%2Fd ​ o cum ​ ent%2Fn ​ ews%2Furn%3Acont​ entI​ tem%3A6​ 3 F7-​ M 2R1-​ DY28-​ G 00P-​ 00000-​00&pdcon​tent​comp​onen​tid=​468​180&pdte​aser​key=​sr9&pdi​tab=​allp​ods&ecomp=​ nzvnk&earg=​sr9&prid=​3c592​10a-​fdc4-​4d3a-​95cb-​a8fd4​011a​afc. 148. Joseph Fewsmith, The Logic and Limits of Political Reform in China (Cambridge: Cambridge University Press, 2013); Yu Keping, Democracy Is a Good Thing: Essays on Politics, Society, and Culture in Contemporary China (Washington, DC: Brookings Institution Press, 2009).

 

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149. John L. Thornton, “Long Time Coming: The Prospects for Democracy in China,” Foreign Affairs 87 (2008): 2–​22. 150. Fewsmith, Logic and Limits. 151. “A Ten-​Year Review of China’s Political Development and Future Prospects,” International Symposium, Institute of Political Science, Chinese Academy of Social Sciences and Carter Center, December 12–​13, 2012. 152. Thornton, “Long Time Coming.” 153. Lardy, The State Strikes Back; Naughton, The Chinese Economy. 154. Heilmann, Red Swan, 203–​209. 155. Andrew C. Mertha, “‘Fragmented Authoritarianism 2.0’: Political Pluralization in the Chinese Policy Process,” China Quarterly 200 (2009): 995–​1012. 156. Xia Cai, “Shibai de dang [the party’s failure],” Foreign Affairs, December 4, 2020. 157. Richard Rose and Doh Chull Shin, “Democratization Backwards: The Problem of Third-​ Wave Democracies,” British Journal of Political Science 31 (2001): 331–​354; O. Fiona Yap, “A Strategic Model of Economic Performance and Democratizaton in South Korea and Taiwan,” British Journal of Political Science 42 (2011): 213–​239; Eva Bellin, “Contingent Democrats: Industrialists, Labor, and Democratization in Late-​Developing Countries,” World Politics 52, no. 2 (2000): 175–​205. 158. Seymour Martin Lipset, “Some Social Requisites of Democracy: Economic Development and Political Legitimacy,” American Political Science Review 53, no. 1 (1959): 690105; John B. Londregan and Keith T. Poole, “Does High Income Promote Democracy?,” World Politics 49, no. 1 (1996): 1–​30. 159. Barrington Moore Jr., Social Origins of Dictatorship and Democracy: Lord and Peasant in the Making of the Modern World (Boston: Beacon Press, 1966). 160. The literature on the middle class in both countries is substantial. Recent contributions include Björn Gustafsson, Xiuna Yang, and Terry Sicular, “Catching Up with the West: Chinese Pathways to the Global Middle Class,” China Journal 84 ( July 2020): 102–​137; Bryn Rosenfeld, The Autocratic Middle Class: How State Dependency Reduces the Demand for Democracy (Princeton, NJ: Princeton University Press, 2020); Thomas F. Remington, “The Russian Middle Class as Policy Objective,” Post-​Soviet Affairs 27, no. 2 (2011): 1–​37. 161. Li, “Heterogeneous Composition,” 401. 162. Rozelle and Hell, Invisible China, 82. 163. Thomas F. Remington and Po Yang, “Public-​Private Partnerships for Skill Development in the United States, Russia, and China,” Post-​Soviet Affairs 36, nos. 5–​6 (2020): 495–​514. 164. Rozelle and Hell, Invisible China, 85–​100; Li Jun, “Predicaments and Breakthroughs in the Participation of Chinese Enterprises in Vocational Education: An Analysis Based on Public Choice Theory and Labor Economics,” Research in Educational Development, March 2015, 52–​558, http://​en.cnki.com.cn/​Art​icle​_​en/​CJFDTO​TAL-​SHGJ20​1503​013.htm; Lei wang and Heidi Ross, “Vocational Education (I): Current Issues and Challenges,” Chinese Education and Society 46, no. 4 (2013): 3–​11. 165. Peter H. Lindert, Growing Public: Social Spending and Economic Growth since the Eighteenth Century (Cambridge: Cambridge University Press, 2004); Stephan Haggard and Robert R. Kaufman, Development, Democracy and Welfare States: Latin America, East Asia, and Eastern Europe (Princeton, NJ: Princeton University Press, 2008); Christian Aspalter, “The East Asian Welfare Model,” International Journal of Social Welfare 15 (2006): 290–​301. 166. Robert R. Kaufman and Alex Segura-​Ubiergo, “Globalization, Domestic Politics and Social Spending in Latin America: A Time-​Series Cross-​Section Analysis, 1973–​1997,” World Politics 53, no. 4 (2001): 553–​587. 167. Diana Fu and Greg Distelhorst, “Grassroots Participation and Repression under Hu Jintao and Xi Jinping,” China Journal 79, no. 1 (2018): 100–​122, https://​doi.org/​10.1086/​694​ 299; Regina Smyth, Elections, Protest, and Authoritarian Regime Stability: Russia, 2008–​ 2020 (New York: Cambridge University Press, 2020); Timothy Frye, Weak Strongman: The Limits of Power in Putin’s Russia (Princeton, NJ: Princeton University Press, 2021); Cheng Li, Chinese Politics in the Xi Jinping Era: Reassessing Collective Leadership (Washington, DC: Brookings Institution Press, 2016).

 



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Chapter 9 1. These calculations are based on the following sources. Germany household income figures:   German Statistical Service (destatis), Data to the income, receipts, and expenditure of households, 2018   https://​www.desta​tis.de/​EN/​The​mes/​Soci​ety-​Envi​ronm​ent/​Inc​ome-​Cons​umpt​ion-​Liv​ ing-​Con​diti​ons/​Inc​ome-​Recei​pts-​Expe​ndit​ure/​Tab​les/​inc​ome-​expe​ndit​ure-​territ​ory-​evs. html?view=​main; German Institute for Economic Research (DIW Berlin), Socio-​Economic Panel (SOEP), data for years 1984–​2017, version 34, 2019, https://​doi.org/​10.5684/​soep. v34. I am grateful to DIW for permission to use the SOEP data. For the United States: Jessica Semega, Melissa Kollar, Emily A. Shrider, and John F. Creamer, Income and Poverty in the United States: 2019, P60-​270 (Washington, DC: US Census Bureau, September 2020); FRED St. Louis, https://​fred.stl​ouis​fed.org; for PPP conversion rates, World Bank WDI, https://​datab​ank.worldb​ank.org/​repo​rts.aspx?sou​rce=​world-​deve​lopm​ent-​ind​icat​ors#. 2. WID World, https://​wid.world/​data/​. 3. This represents the ratio of median household income to mean family income, in real 2020 US dollars, from the US Census Bureau. The OECD uses a slightly different basis for calculating income figures, so for any given year, the figures are not strictly comparable. However, the measures are consistent over time, so the trends are directly comparable. 4. OECD, “Old-​Age Income Inequality,” in Pensions at a Glance 2019: OECD and G20 Indicators (Paris: OECD Publishing, 2019), 191, https://​doi.org/​10.1787/​b00d8​f0e-​en. 5. Calculated from SOEP data for years 1984–​2017. 6. Post-​tax and transfer share calculated from IPUMS figures for 2016. Steven Ruggles, Sarah Flood, Sophia Foster, Ronald Goeken, Jose Pacas, Megan Schouweiler, and Matthew Sobek, IPUMS USA: Version 110 (data set) (Minneapolis, MN: IPUMS, 2021), https://​doi.org/​ 10.18128/​D 0 1 0 . V 1 1 . 0. Pretax income share (2014) in WID.world, https://​wid.world/​data/​. 7. Credit Suisse Research Institute, Global Wealth Report 2021, June 2021, 24. 8. Stefan Bach, Andreas Thiemann, and Aline Zucco, “Looking for the Missing Rich: Tracing the Top Tail of the Wealth Distribution,” International Tax and Public Finance 26 (2019): 1234–​ 1258; see also Carsten Schröder, Charlotte Bartels, Konstantin Göbler, Markus M. Grabka, and Johannes König, “Millionärinnen under dem Mikroskop: Datenlücke bei sehr hohen Vermögen geschlossen—​Konzentration höher als bisher ausgewiesen,” DIW Wochenbericht 29 (2020): 512–​521. 9. Stefan Bach and Sebastian Eichfelder, “Reform der Immobilient besteuerung: Bodenwerte belasten und Priviligien Streichen,” DIW Wochenbericht 27 (2021), https://​doi.org/​ 10.18723/​diw​_​wb:2021-​27-​3. 10. US Census Bureau figures from Semega et al., “Income and Poverty.” 11. DeStatis: Statistisches Bundesamt, “19.7% der Bevölkerung Deutschlands von Armut oder sozialer Ausgrenzung bedroht,” Pressemitteiling No. 292, November 8, 2017; DeStatis, Statistisches Bundesamt, “Wirtschaftsrechnungen, 2016,” Leben in Europa (EU-​ SILC): Einkommen und Lebensbedingungen in Deutschland und der Europäischen Union,” Fachserie 15, Reihe 3, 2018. 12. Jacob S. Hacker, The Great Risk Shift: The New Economic Security and the Decline of the American Dream, 2nd ed. (New Haven, CT: Yale University Press, 2019). 13. Peter A. Hall, “Policy Paradigms, Social Learning, and the State: The Case of Economic Policymaking in Britain,” Comparative Politics 25, no. 3 (1993): 275–​296. 14. Maxine Yaple Sweezy, “Distribution of Wealth and Income under the Nazis,” Review of Economics and Statistics 21, no. 4 (November 1939): 182. 15. Arthur Schweitzer, Big Business in the Third Reich (Bloomington: Indiana University Press, 1964), 6. 16. See, especially, Reinhard Blum, “Brauchen wir eine neue Soziale Marktwirtschaft?” Volkswirtschaftliche Diskussionsreihe, No. 229, Universität Augsburg, Institut für Volkswirtschaftslehre, Augsburg, October 2002, for a discussion of the contributions of Catholic social thought to the social market economy model. 17. Thilo N. H. Albers, Charlotte Bartels, and Moritz Schularick, “Wealth and Its Distribution in Germany, 1895–​2018,” CESIFO Working Papers, 9739 2022, May 2022, 25–​27.

 

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18. In 1995, the Federal Constitutional Court ruled that the wealth tax was unconstitutional because it violated the principle that all forms of wealth should be treated alike under tax law. The government then suspended the tax and has not reimposed it since. 19. Werner Abelshauser, Deutsche Wirtschaftsgeschichte seit 1945 (Munich: C. H. Beck, 2004), 123–​124; Harm G. Schröter, “Von der Teilung zur Wiedervereinigung, 1945–​ 2004,” in Michael North, ed., Deutsche Wirtschaftsgeschichte: Ein Jahrtausend im Überblick, (München: Verlag C. H. Beck, 2nd ed., 2005). 20. Cf. Peter A. Hall and David Soskice, eds., Varieties of Capitalism (New York: Oxford University Press, 2001). 21. For example, see Kathleen Thelen, Varieties of Liberalization and the New Politics of Social Solidarity (New York: Cambridge University Press, 2014). 22. Ludwig Erhard, “Mittelstandspolitik,” in Aktionsgemeinschaft Soziale Marktwirtschaft, Der mittelständische Unternehmer in der sozialen Marktwirtschaft. Wortlauf der Vorträge auf der 4. Arbeitstagung der Aktionsgemeinschaft Soziale Marktwirtschaft e. V. am 17. November 1955 in Bad Godesberg (Ludwigsburg: M. Hoch, 1955), 51–​61. 23. Grundgesetz für die Bundesrepublik Deutschland, Art. 14, no. 2, http://​www.gese​tze-​im-​ inter​net.de/​gg/​GG.pdf. 24. Alfred Müller-​Armack, “The Social Aspect of the Economic System,” in Standard Texts on the Social Market Economy: Two Centuries of Discussion, ed. Wolfgang Stützel, Christian Watrin, Hans Willgerodt, and Karl Hohmann, trans. Derek Rutter (New York: Gustav Fischer, 1982), 21. 25. Guido G. Goldman, “The German Economic Challenge,” in The Political Economy of West Germany: Modell Deutschland, ed. Andrei S. Markovits (New York: Praeger, 1982). Note that many contemporary American progressives propose a similar set of principles to guide economic policy, among them Massachusetts senator Elizabeth Warren and Joseph Stiglitz. 26. Among the more recent publications are Josef Hien and Christian Joerges, eds., Ordoliberalism, Law and the Rule of Economics (Oxford: Hart Publishing, 2017) and Thomas Biebricher and Frieder Vogelmann, eds., The Birth of Austerity: German Ordoliberalism and Contemporary Neoliberalism (New York: Rowman & Littlefield, 2017). In addition, several recent books deal with ordoliberalism in the context of neoliberalism. Among these are Philip Mirowski and Dieter Plehve, eds., The Road from Mont Pèlerin: The Making of the Neoliberal Thought Collective (Cambridge, MA: Harvard University Press, 2015); Mark I. Vail, Liberalism in Illiberal States: Ideas and Economic Adjustment in Contemporary Europe (New York: Oxford University Press, 2017); Quinn Slobodian, The Globalists: The End of Empire and the Birth of Neoliberalism (Cambridge, MA: Harvard University Press, 2018); Mark Blyth, Austerity: The History of a Dangerous Idea (New York: Oxford University Press, 2013).   In 1978–​79 the French philosopher Michel Foucault dedicated a series of lectures at the Collège de France to the theme of neoliberalism and ordoliberalism. Foucault emphasized the particular contributions of Freiburg school ordoliberals to the evolution of neoliberal thought. His essays had considerable influence on French and other scholars, awakening a new interest in the ordoliberals. Less a history than a commentary, Foucault’s essays overlooked some of the major influences on the ordoliberals, among them the rise of monopoly capitalism and Soviet communism as alternatives to a liberal market economy. See Michel Foucault, The Birth of Biopolitics: Lectures at the College de France, 1978–​79, ed. Michel Senellart, trans. Graham Burchell (Houndsmill, Basingstoke, Hampshire: Palgrave Macmillan, 2008). For an essay reviewing some of this literature, see Thomas F. Remington, “Ordoliberalism Revisited,” Changing Societies and Personalities 6, no. 1 (2022): 10–​34. A comprehensive English-​language study of ordoliberalism and its relationship to other variants of liberal philosophy is Kenneth Dyson, Conservative Liberalism, Liberalism, Ordo-​liberalism, and the State (New York: Oxford University Press, 2021). Several German scholars have examined ordoliberalism closely. See Stefan Kolev, Neoliberale Staatsverständnisse im Vergleich, 2nd ed. (Berlin: De Gruyter Oldenbourg, 2017); Volume 17 of Marktwirtschaftliche Reformpolitik, Schriftenreihe der Aktionsgemeinschaft Soziale Marktwirtschaft e.V., ed. Nils Goldschmidt, Rolf H. Hasse, and Joachim Starbatty; Wilga Föste, Grundwerte in der Ordnungskonzeption der Sozialen Marktwirtschaft (Marburg: Metropolis, 2006); Stefan Kolev and Ekkehard A. Köhler, “Transatlantic Roads to Mont Pelerin: ‘Old Chicago’ and Freiburg in a World

 



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of Disintegrating Order,” Stigler Center for the Study of the Economy and the State, New Working Paper Series no. 309, June 2021. 27. Dyson, Conservative Liberalism, distinguishes ordoliberalism from the laissez-​faire versions developed by the Austrian and Chicago schools. Kolev (Neoliberale Staatsverständnisse im Vergleich, 33) proposes this scheme. 28. To be sure, some confusion over this point is understandable. The Freiburg school ordoliberals had close relations to the group of economic thinkers associated with the Mont Pèlerin Society that formed in 1947. Eucken was an original member of the group. Moreover, Hayek himself moved to the University of Freiburg in 1962, taking the chair formerly held by Eucken; the ORDO yearbook and the Walter Eucken Institute at Freiburg became voices of Hayekian neoliberal thought. Moreover, both streams of thought were themselves diverse and often self-​contradictory, and both underwent continuous evolution as new generations of thinkers and issues arose. Certainly it is fair to say that the bodies of thought termed “neoliberalism” and “ordoliberalism” did and do overlap. 29. In addition to Dyson, an authoritative German-​language study on the ordoliberal philosophy is Föste, Grundwerte. Varieties of neoliberalism Neoliberalism

Welfare state liberalism (Keynes; Pigou)

Sociological liberalism (Röpke; Rüstow; Müller-Armack)

Ordoliberalism

Freiburg school liberalism (Eucken; Böhm; Großmann-Doerth)

“Free market liberalism” (von Mises; Rothbard; Israel M. Kirzner)

“Evolutionary liberalism” (von Hayek)

30. Walter Eucken, Grundsätze der Wirtschaftspolitik, 7th ed. (Tübingen: Mohr Siebeck, 2004), 374–​375. 31. Föste, Grundwerte, 346. The ordoliberals insisted on the need for a unified, coherent economic and social policy: “die Einheit von Wirtschafts-​, Sozial, und Gesellschaftspolitik”; Blum, “Brauchen wir eine neue Soziale Marktwirtschaft?,” 3. 32. Walter Eucken, Nationalökonomie—​wozu? (Leipzig: Felix Meiner Verlag, 1938), 57. “Teils sehnt man die frühere Zeit zurück, verwechselt laisser faire und Wettbewerb und sieht nicht, daß das laisser faire oft gerade zur Beseitigung der Wettbewerbsordnung und zum Emporwuchern monopolitischer Gebilde führte” [In part one longs for the former time, confuses laissez-​faire and competition, and does not see that the laissez-​faire often led to the elimination of the competitive order and to the proliferation of monopolistic entities]. 33. In fact, there were multiple overlapping circles of intellectuals linked to the University of Freiburg. During the war, One person associated with one of these circles was the pastor Dietrich Bonhoeffer, who was arrested and killed by the Nazis for his anti-​regime stance. Bonhoeffer, and some of the others in these circles of legal and economics specialists, strongly believed that a Christian’s ethical responsibility in a time of tyranny was to defy the commandment to obey the secular authorities and to do what one could to act in the world. For these people, it meant working out programs for a postwar economic order.   Another wing wanted the government to play an interventionist role to ensure social justice and protect competition; others were skeptical of government intervention but did want a legal order that protected competition against any concentration of power, private, or public. The group most closely associated with Walter Eucken emphasized the importance of liberal

 

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values—​meaning both economic and political liberty. Many of these ideas influenced the conception of the “social market economy” after the war. Eucken himself, however, was deeply religious and steeped in Kantian philosophy, and regarded liberalism as essential to preserving individual moral freedom. A strong ethical orientation ran deeply through all these circles.   A valuable study of these currents of thought is Christine Blumenberg-​ Lampe, Das wirtschaftliche Programm der 'Freiburger Kreise': Entwurf einer freiheit-​ sozialen Nachkriegswirtschaft Nationalökonom gegen den Nationalsozialismus, (Berlin: Duncker & Humblot, 1973). 34. A. J. Nicholls, Freedom with Responsibility: The Social Market Economy in Germany, 1918–​1963 (Oxford: Oxford University Press, 1994), 46; Jeffrey Fear, “Cartels and Competition: Neither Markets nor Hierarchies,” 07-​011, Harvard Business School, 2006, 20. 35. Schweitzer, Big Business. 36. Quoted in Stephen F. Cohen, Bukharin and the Bolshevik Revolution: A Political Biography, 1888–​1938 (New York: Knopf, 1973), 30, 70. 37. Thomas F. Remington, Building Socialism in Bolshevik Russia: Ideology and Industrial Organization, 1917–​1921 (Pittsburgh, PA: University of Pittsburgh Press, 1984), 8. 38. In 1910, Debs wrote: The trusts and monopolies of today are the natural development of industry, and they are going to continue this development until the pressure becomes so severe that a change will be made necessary. . . . We are now at the threshold of a new order. Individual competition having run its course, has now become monopoly, whether men wish it or no. . . . We are to have greater industries: they are developing every day. . . . There is only one road out of the morass into which every nation of the earth finds itself. That is, that all industries shall be owned by all the people. . . . With that collective or as you understand it, public ownership, there could be no great private fortunes built up, but the industries would be greater and greater, benefiting all who worked in them or used their products. The common wealth would then be common wealth—​not private wealth. Monopoly is certain and sure. It is merely a question of whether we will be collectively owned monopolies, for the good of the race, or whether they will be privately owned for the power, pleasure, and glory of the Morgans, Rockefellers, Guggenheims and Carnegies. You have a choice between these two ways, but you have no other choice. Eugene V. Debs, “A Study of Competition,” Appeal to Reason, May 28, 1910. 39. Quoted in Daniel A. Crane, “Lochnerian Antitrust,” NYU Journal of Law & Liberty 1, no. 1 (2005): 504. 40. See Eucken, Grundsätze der Wirtschaftspolitik. 41. Four decades later, Yale economist Charles Lindblom laid out a similar framework that contrasted administrative power and the market as two alternative ways of allocating a society’s resources. Charles E. Lindblom, Politics and Markets: The World’s Political-​Economic Systems (New York: Basic Books, 1977). 42. Nicholls, Freedom with Responsibility, 62. 43. Eucken, Grundsätze der Wirtschaftspolitik, 172. 44. Franz Böhm, “Das Problem der privaten Macht—​Ein Beitrag zur Monopolfrage” (1928), in Grundtexte zur Freiburger Tradition der Ordnungsökonomik, ed. Nils Goldschmidt and Michael Wohlgemuth (Tübingen: Mohr Siebeck, 2008), 43–​67. 45. Eucken, Grundsätze der Wirtschaftspolitik. 46. Eucken, Grundsätze der Wirtschaftspolitik, 178. 47. Eucken, Grundsätze der Wirtschaftspolitik. 48. On the relation between the Nazi regime and big business, see Schweitzer, Big Business. 49. Müller-​Armack, “Social Aspect.” 50. Franz Böhm, “Das Problem der privaten Macht” (1928), in Franz Böhm, Reden und Schriften (Karlsruhe, C. F. Müller Verlag, 1960), 25–​45; Franz Böhm, Wettbewerb und Monopolkampf: Eine Untersuchung zur Frage des wirtschaftlichen Kampfrechts und zur Frage der rechtlichen Struktur der geltenden Wirtschaftsordnung (Berlin: Carl Heymanns Verlag, 1933). 51. Fritz Kestner, Der Organisationszwang: Eine Untersuchung über die Kämpfe zwischen Kartellen und Außenseitern (Berlin: Carl Heymanns Verlag, 1912).

 



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52. Dyson, Conservative Liberalism, 356–​358. 53. Abelshauser, Wirtschaftsgeschichte, 120. 54. Nicholls, Freedom with Responsibility, 208. 55. Abelshauser, Wirtschaftsgeschichte, 127. 56. Abelshauser, Wirtschaftsgeschichte, 69. 57. On US policy interests, see Abelshauser, Wirtschaftsgeschichte; Werner Abelshauser, “The First Post-​liberal Nation? Stages in the Development of Modern Corporatism in Germany,” European History Quarterly 14 (1984): 285–​318. On the impact of American views of antitrust in Germany and Japan, Wyatt Wells concludes that the US effort to kill cartels succeeded when it was “part of a broader program of liberalization, and it failed where liberalization did not take hold.” Wyatt Wells, Antitrust and the Formation of the Postwar World (New York: Columbia University Press, 2002), 212. 58. Quotations cited in Terence W. Hutchison, “Notes on the Effects of Economic Ideas on Policy: The Example of the German Social Market Economy,” Zeitschrift für die gesamte Staatswissenschaft 135, no. 3 (1979): 435–​439. 59. Angela Wigger, “Debunking the Myth of the Ordoliberal Influence on Post-​war European Integration,” in Ordoliberalism, Law and the Rule of Economics, ed. Josef Hien and Christian Joerges (Oxford, Hart Publishing, 2017), 177. 60. Ralph Ptak, “Neoliberalism in Germany: Revisiting the Ordoliberal Foundations of the Social Market Economy,” in The Road from Mont Pèlerin: The Making of the Neoliberal Thought Collective, ed. Philip Mirowski and Dieter Plehve (Cambridge, MA: Harvard University Press, 2015), 98–​137. 61. For example, Quinn Slobodian writes that ordoliberalism represents an effort to “encase” and “inoculate” market capitalism against democracy. Slobodian, The Globalists. 62. Dyson, Conservative Liberalism, 430. 63. “Synthese von Freiburger imperativ und Keynesianischen Botschaft.” Quoted in Abelshauser, Deutsche Wirtschaftsgeschichte seit 1945, 413; Peter J. Katzenstein, Policy and Politics in West Germany: The Growth of a Semisovereign State (Philadelphia: Temple University Press, 1987), 112. 64. Cf. Wolfgang Streeck, “German Capitalism: Does It Exist? Can It Survive?,” New Political Economy 2, no. 2 (1997): 237–​256; Wolfgang Streeck, Re-​forming Capitalism: Institutional Change in the German Political Economy (Oxford: Oxford University Press, 2010); Hall and Soskice, Varieties of Capitalism. 65. Lisa Murach-​Brand, Antitrust auf Deutsch: Der Einfluss der amerikanischen Allierten auf das Gesetz gegen Wettbewerbsbeschränkungen (GWB) nach 1945 (Tübingen: Mohr-​Siebeck, 2004). 66. Murach-​Brand, Antitrust auf Deutsch. 67. Murach-​Brand, Antitrust auf Deutsch, 228. 68. John O. Haley, Antitrust in Germany and Japan: The First Fifty Years, 1947–​ 1998 (Seattle: University of Washington Press, 2001). 69. Haley, Antitrust ; Murach-​Brand, Antitrust auf Deutsch. 70. On enforcement of the competition law, see Christoph Heusgen, Ludwig Erhards Lehre von der Sozialen Marktwirtschaft: Ursprünge, Kerngehalt, Wandlungen (Stuttgart: Paul Haupt, 1981). 71. Ludwig Erhard, Prosperity through Competition, trans. and ed. Edith Temple Roberts and John B. Wood (Auburn, AL: Ludwig von Mises Institute, 2011). 72. Barry Naughton, Growing out of the Plan: Chinese Economic Reform, 1978–​ 1993 (New York: Cambridge University Press, 1995). 73. Scholars such as Peter Behrens and David Gerber stress the distinctively German and ordoliberal sources of EU competition policy, whereas others, such as Pinar Akman, stress the French regulatory tradition and American antitrust law as primary influences, faulting EU competition law for being too focused on protecting competitors in the name of protecting competition. Sigrid Quack and Marie-​Laure Djelic offer a balanced account of the development of German and EU competition law from ordoliberal origins, showing that the evolution of antitrust law in Germany and at the EU level tended toward mutual reinforcement. See Pinar Akman, The Concept of Abuse in EU Competition Law: Law and Economic Approaches (London: Hart Publishing, 2012); Peter Behrens, “The ‘Consumer Choice’ Paradigm in German Ordoliberalism and Its Impact upon EU Competition Law,”

 

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Europa-​Kolleg Hamburg, Institute for European Integration, Discussion Paper no. 1/​14, March 2014; Peter Behrens, “The Ordoliberal Concept of ‘Abuse’ of a Dominant Position and its Impact on Article 102 TFEU,” in Abusive Practices in Competition Law, ed. Fabiana Di Porto and Rupprecht Podszun (Elgaronline, 2018), 5–​25; David J. Gerber, Law and Competition in Twentieth-​Century Europe: Protecting Prometheus (New York: Oxford University Press, 2001); Daniel J. Gifford and Robert T. Kudrle, The Atlantic Divide in Antitrust: An Examination of US and EU Competition Policy (Chicago: University of Chicago Press, 2019); Sigrid Quack and Marie-​Laure Djelic, “Adaptation, Recombination, and Reinforcement: The Story of Antitrust and Competition Law in Germany and Europe,” in Beyond Continuity: Institutional Change in Advanced Political Economies, ed. Wolfgang Streeck and Kathleen Thelen (New York: Oxford University Press, 2005), 255–​281. 74. Congressional Research Service, The Marshall Plan: Design, Accomplishments and Significance (Washington, DC: CRS, January 18, 2018). 75. Today the government owns 80% of the shares of the bank; 20% are held by private investors. 76. Abelshauser, Deutsche Wirtschaftsgeschichte seit 1945, 130 ff. 77. Abelshauser, Deutsche Wirtschaftsgeschichte seit 1945, 287. 78. Andrei S. Markovits, “The Legacy of Liberalism and Collectivism in the Labor Movement: A Tense but Fruitful Compromise for Model Germany,” in The Political Economy of West Germany: Modell Deutschland, ed. Andrei S. Markovits (New York: Praeger, 1982). 79. Abelshauser, Deutsche Wirtschaftsgeschichte seit 1945, 410–​411. Text of the law may be found at https://​www.bund​esfi​nanz​mini​ster​ium.de/​Cont​ent/​EN/​Stan​dard​arti​kel/​Minis​try/​ Laws/​1967-​06-​08-​act-​to-​prom​ote-​econo​mic-​stabil​ity-​and-​gro​w th.pdf ?_​_​b​lob=​publ​icat​ ionF​ile&v=​3. 80. Katzenstein, Policy and Politics, 179. 81. Stephen J. Silvia, “The West German Labor Law Controversy: A Struggle for the Factory of the Future,” Comparative Politics 20, no. 2 ( January 1988): 164. 82. The idea that Germany’s postwar “economic miracle” was based on a particular model of economic development that combined liberalism and social security had become widely debated around the world. The shorthand for this idea was “Modell Deutschland.” Newsweek magazine devoted a cover story to the idea in 1976. In the mid-​1970s, “Modell Deutschland” had something of the same catnip quality for journalists as the notion of a “China model.” Willy Brandt und Helmut Schmidt, “Theorie und Grundwerte: Weiterarbeiten am Modell Deutschland,” SPD-​Parteitag, Dortmund, June 18–​19, 1976. 83. Quoted in Isabella M. Weber, “How to Make a Miracle? Ludwig Erhard’s Post-​war Price Liberalisation in China’s 1980s Reform Debate,” New School for Social Research Working Paper 03/​2019, March 2019, 13. 84. Isabella M. Weber, How China Escaped Shock Therapy: The Market Reform Debate (New York: Routledge, 2021); Weber, “How to Make a Miracle.” 85. For example, Barry Eichengreen and Albrecht Ritschl, “Understanding West German Economic Growth in the 1950s,” Working Paper no. 113/​08, December 2008. 86. Jochen Clasen, “Social Security—​the Core of the German Employment-​Centred Social State,” in Social Policy in Germany, ed. Jochen Clasen and Richard Freeman (New York: Harvester Wheatsheaf, 1994), 61–​82; Stephan Leibfried and Herbert Obinger, “The State of the Welfare State: German Social Policy between Macroeconomic Retrenchment and Microeconomic Recalibration,” in Germany: Beyond the Stable State, ed. Herbert Kitschelt and Wolfgang Streeck (Portland OR, Frank Cass, 2004), 216; Stephen J. Silvia, “Why Germany Reformed Public Pensions, but the United States Did Not,” German Studies Review 32 (2009): 23–​50. 87. Leibfried and Obinger, “State of the Welfare State,” 209. 88. Leibfried and Obinger, “State of the Welfare State.” 89. OECD figures, https://​data.oecd.org/​pens​ion/​net-​pens​ion-​repl​acem​ent-​rates.htm; CES ifo.DICE report 13:3 (Summer 2015), https://​www.ifo.de/​DocDL/​dice-​rep​ort-​2015-​2-​ june.pdf. 90. Florian Dorn, Stefanie Gäbler, Björn Kauder, et al., “Die Zusammensetzung des öffentlichen Budgets in Deutschland,” Leibniz-​Institut für Wirtschaftsforschung, July 2018. 91. Michael Moran, “Health Care Policy,” in Social Policy in Germany, ed. Jochen Clasen and Richard Freeman (New York: Harvester Wheatsheaf, 1994), 83–​101.

 



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92. This section draws in part on Thomas F. Remington, “Public-​Private Partnerships in TVET: Adapting the Dual System in the United States,” Journal of Vocational Education & Training 70, no. 4 (2018): 497–​522. 93. Nancy Hoffman and Robert Schwartz, “Gold Standard: The Swiss Vocational Education and Training System,” International Comparative Study of Vocational Education Systems, National Center on Education and the Economy, March 2015; Nancy Hoffman, Schooling in the Workplace: How Six of the World’s Best Vocational Education Systems Prepare Young People for Jobs and Life (Cambridge, MA: Harvard Education Press, 2011). 94. Kathleen Thelen, How Institutions Evolve: The Political Economy of Skills in Germany, Britain, the United States, and Japan (New York: Cambridge University Press, 2004). 95. Hoffman, Schooling in the Workplace. 96. The government’s funding is split between direct support for schools—​representing about 54% of the total—​and oversight and administration of the system. 97. Silvia, “West German Labor Law.” 98. Wolfgang Streeck and Anke Hassel, “The Crumbling Pillars of Social Partnership,” in Germany: Beyond the Stable State, ed. Herbert Kitschelt and Wolfgang Streeck (Portland, OR: Frank Cass, 2004), 103. 99. Wolfgang Streeck, Industrial Relations in West Germany: A Case Study of the Car Industry (London: Heinemann, 1984). 100. International Monetary Fund, “Germany: Selected Issues,” IMF Country Report no. 19.214, July 2019; Achim Wambach and John Weche, “Hat Deutschland ein Marktmachtproblem?,” Wirtschaftdienst 98, no. 11 (November 2018): 791–​798. 101. Thelen, Varieties of Liberalization. 102. World Bank WDI, https://​datab​ank.worldb​ank.org/​repo​rts.aspx?sou​rce=​world-​deve​lopm​ ent-​ind​icat​ors#. The labor force participation rate is measured as the percentage of total population ages 15–​64 in the workforce. 103. OECD: unemployment rate, 15–​24 year olds, https://​stats.oecd.org/​Index.aspx?Quer​yId=​ 36499. 104. Cf. Hans Mittelbach, Entwicklungen und Umbrüche der Einkommens-​und Vermögensverteilung in Ostdeutschland vor und nach der deutschen Vereinigung (1970–​1994) (Regensburg: Transfer Verlag, 2005); Hannah E. Kettler, “The Emergence of Concentrated Ownership Structures in East Germany: The Implications for Enterprise Restructuring,” Review of Political Economy 9, no. 2 (1997): 117–​149; Eric von der Heyden, “Privatization in East Germany: The Delivery of an Economy,” Columbia Journal of World Business 30, no. 3 (Fall 1995): 42–​54; Douglas Webber, “The Decline and Resurgence of the ‘German Model,’” Journal of European Public Policy 1, no. 2 (1994): 151–​175. 105. Richard Hauser, “Problems of the German Welfare State after Unification,” Oxford Review of Economic Policy 11, no. 3 (1995): 51; von der Heyden, “Privatization in East Germany.” 106. Christian Schweiger, “Deutschland eineg Vaterland? East-​West Cleavages in Germany Thirty Years after Reunification,” German Politics and Society 132, no. 3 (2019): 18–​31. 107. Russell J. Dalton and Steven Weldon, “Germans Divided? Political Culture in a United Germany,” German Politics 19, no. 1 (2010): 9–​23; Ross Campbell and David P. Conradt, “The Civic Culture at 50: Change, Continuity and Challenges in the Federal Republic of Germany,” German Politics 24, no. 3 (2015): 217–​233. 108. On the rebuilding of public education in the west, see Brian M. Puaca, Learning Democracy: Education Reform in West Germany, 1945–​1965 (New York: Berghahn Books, 2009). On the remaking of the judicial system in the east, see Inga Markovits, Imperfect Justice: An East-​West German Diary (New York: Oxford University Press, 1995). 109. Kettler, “Emergence of Concentrated Ownership,” 135. 110. Webber, “Decline and Resurgence,” 169–​170. 111. Webber, “Decline and Resurgence,” 169–​170. 112. Hauser, “German Welfare State,” 51. 113. Webber, “Decline and Resurgence,” 170–​171. 114. Hauser, “German Welfare State,” 52. Household equivalent income is defined by the criteria used by the German social welfare system. A head of household is equivalent to 1; children

 

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to fractions of 1, according to age. The poverty line is defined as 50% of mean net personal income. 115. Kettler, “Emergence of Concentrated Ownership,” 135. 116. Monopolkommission, Hauptgutachten XXII: Wettbewerb 2018. Kapitel II. Stand und Entwicklung der Unternehmenskonzentration in Deutschland, http://​www.monopo​lkom​ miss​ion.de/​ima​ges/​HG22/​HGXXII_​Kap​2_​Un​tern​ehme​nsko​nzen​trat​ion.pdf, 2019, 93–​ 94; Monopolkommission, Hauptgutachten XXII, Wettbewerb 2018 (Baden-​Baden: Nomos Verlag, 2018; Helen Heidorn and John P. Weche, Business Concentration Data for Germany (Bonn: Monopolkommission, September 2019); Wambach and Weche, “Hat Deutschland ein Marktmachtproblem?” 117. Monopolkommission, Stand und Entwicklung, 166–​175. 118. These are the so-​called Riester pensions. See Leibfried and Obinger, “State of the Welfare State”; Hans Günter Hockerts, Der deutsche Sozialstaat: Entfaltung und Gefährdung seit 1945 (Göttingen: Vandenhoeck & Ruprecht, 2011); Gerhard Ritter, Der Sozialstaat: Entstehung und Entwicklung im internationalem Vergleich (Munich: R. Oldenbourg Verlag, 2010). 119. Cf. Streeck and Hassel, “Crumbling Pillars.” 120. Stephan Leibfried and Herbert Obinger, “The State of the Welfare State: German Social Policy between Macroeconomic Retrenchment and Microeconomic Recalibration,” in Germany: Beyond the Stable State, ed. Herbert Kitschelt and Wolfgang Streeck (Portland OR: Frank Cass, 2004), 199–​218; Hockerts, Der deutsche Sozialstaat; Ritter, Der Sozialstaat. 121. Jürgen Beyer and Martin Höpner, “The Disintegration of Organised Capitalism: German Corporate Governance in the 1990s,” in Germany: Beyond the Stable State, ed. Wolfgang Streeck and Herbert Kitschelt (Portland, OR: Frank Cass, 2004), 179–​198. 122. Germany has a higher percentage of old-​age dependents than France, Britain, or the United States. In the past two decades, the age dependency ratio as a share of the working-​age population rose by 10 percentage points, from around 23% to 33% (World Development Indicators).   A comprehensive 2022 study of the important challenges faced by the German economy with respect to digitalization, social inclusiveness, and a transition to clean energy is a recent OECD report: Germany. 2022. Building Agility for Successful Transitions (Paris: OECD Publishing, 2022). 123. Volker Berghahn and Sigurt Vitols, eds., Gibt es einen deutschen Kapitalismus? Tradition und globale Perspektiven der sozialen Markwirtschaft (Frankfurt am Main: Campus Verlag, 2006); Katzenstein, Policy and Politics. 124. Another version is the old farmer’s ax, whose handle has been replaced three times and the head twice, but which the farmer insists is still the same ax. Howard Mansfield, The Same Ax, Twice: Restoration and Renewal in a Throwaway Age (Hanover, NH: University Press of New England, 2000). Still another metaphor along the same lines is the game of the “jenga tower,” where the goal is to rearrange pieces one by one without causing the tower to topple over. One scholar has recently applied this metaphor to China’s incremental reforms, although in China’s case, quite a few of the original pieces have been retained—​including such core institutions as the party’s political monopoly, state ownership and control over key industries, and residency controls. Cf. Weber, How China Escaped Shock Therapy, 10. 125. For example, Jacob S. Hacker, Paul Pierson, and Kathleen Thelen, “Drift and Conversion: Hidden Faces of Institutional Change,” in Advances in Historical-​Comparative Analysis, ed. James Mahoney and Kathleen Thelen (New York: Cambridge University Press, 2015), 180–​208; Wolfgang Streeck and Kathleen Thelen, eds., Beyond Continuity: Institutional Change in Advanced Political Economies (New York: Oxford University Press, 2005); Thelen, Varieties of Liberalization. 126. Affective polarization refers to the tendency to hold hostile feelings toward the opposing party from one’s own and positive feelings toward one own party. It is measured as a weighted average of the difference between the feelings expressed by the partisans of each party toward their own party and the feelings they express toward the out-​party. Levi Boxell, Matthew Gentzkow, and Jesse M. Shapiro, “Cross-​Country Trends in Affective Polarization,” NBER Working Paper 26669, January 2020. On the United States, see also Alan I. Abramowitz

 



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and Steven W. Webster, “The Ideological Foundations of Affective Polarization in the U.S. Electorate,” American Politics Research 45, no. 4 (2017): 621–​647. 127. Ralf Dahrendorf, Gesellschaft und Freiheit: Zur Soziologischen Analyse Der Gegenwart (Munich: R. Piper & Verlag, 1961). 128. Their vote share (second ballot) in the September 2021 Bundestag election was 10.3%. In elections for the Schleswig-​Holstein Landtag in May 2022, Af D’s share of the party vote fell below the 5% cutoff for representation; its share in 2017 was 5.9%. 129. https://​www.cnn.com/​2021/​02/​04/​polit​ics/​2020-​elect​ion-​don​ald-​trump-​voter-​fraud/​ index.html; https://​www.vox.com/​2021/​1/​11/​22225​531/​joe-​biden-​trump-​capi​tol-​inaug​ urat​ion. 130. https:// ​ today.you ​ gov.com/ ​ top ​ i cs/ ​ p olit ​ i cs/ ​ a rtic​ l es-​ repo​ r ts/​ 2 021/​ 0 1/​ 0 6/​ U S-​ c api​ tol-​trump-​poll. 131. On the relationship among polarization, inequality and gridlock, see Nolan McCarty, Keith T. Poole, and Howard Rosenthal, Polarized America: The Dance of Ideology and Unequal Riches, 2nd ed. (Cambridge, MA: MIT Press, 2016). 132. Willi Semmler, “Economic Aspects of Model Germany: A Comparison with the United States,” in The Political Economy of West Germany: Modell Deutschland, ed. Andrei S. Markovits (New York: Praeger 1982), 41–​49. 133. Streeck, “German Capitalism.” 134. Herbert Kitschelt and Wolfgang Streeck, “From Stability to Stagnation: Germany at the Beginning of the Twenty-​First Century,” in Germany: Beyond the Stable State, ed. Herbert Kitschelt and Wolfgang Streeck (Portland, OR: Frank Cass, 2004), 19, 28. 135. Streeck, Re-​forming Capitalism. 136. https://​www.econom​ist.com/​lead​ers/​2021/​09/​25/​the-​mess-​mer​kel-​lea​ves-​beh​ind. 137. Oliver Nachtwey, “German Is Stuck. And There Isn’t Anyone Who Can Move It,” New York Times, September 27, 2021. 138. Abelshauser, Deutsche Wirtschaftsgeschichte seit 1945. 139. This idea echoes an early argument of Wolfgang Streeck about information feedback between innovative scientific and technological research and the production workers on the floor, whose relatively high levels of training through the apprenticeship system allow them to use and improve on existing productive technologies. Wolfgang Streeck, Social Institutions and Economic Performance: Studies of Industrial Relations in Advanced Capitalist Economies (London: Sage, 1992). 140. Jordi Franch Parella and Gemma Carmona Hernandez, “The German Business Model: The Role of the Mittelstand,” Journal of Management Policies and Practices 6, no. 1 (2018): 10–​ 16; Friederike Welter, “The Mittelstand: A Specific Entrepreneurial Profile of the Social Market Economy,” Journal for Markets and Ethics 6, no. 1 (2018): 99–​106; Hansjörg Herr and Zeynep Mualla Nettekoven, “The Role of Small and Medium-​Sized Enterprises in Development: What Can Be Learned from the German Experience?,” Global Labour University, Global Labour Working Paper no. 53, 2018. 141. Hartmut Berghoff, “The End of Family Business? The Mittelstand and German Capitalism in Transition, 1949–​2000,” Business History Review 80, no. 2 (2006): 263–​295. 142. Cf. Erhard’s 1955 address describing his policy toward the Mittelstand. Erhard, “Mittelstandspolitik.” 143. On the Mittelstand, see Berghoff, “End of Family Business”; Erhard, “Mittelstandspolitik”; Parella and Hernandez, “The German Business Model.” 144. Parella and Hernandez, “The German Business Model.” 145. Abelshauser, Deutsche Wirtschaftsgeschichte seit 1945, 330. 146. Herr and Nettekoven, “Role of Small and Medium-​Sized Enterprises,” 17–​18. 147. Herr and Nettekoven, “Role of Small and Medium-​Sized Enterprises”; Berghoff, “End of Family Business.” 148. Roughly 95% of firms that can be considered Mittelstand firms are independent small and medium-​sized enterprises. Friederike Welter, Eva May-​Strobl and Hans-​Jürgen Wolter, “Mittelstand im Wandel,” IfM-​Materialen no. 232, October 2014, 17. 149. Welter, “The Mittelstand”; Berghoff, “End of Family Business.” 150. Berghoff, “End of Family Business.”

 

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151. Abelshauser, Deutsche Wirtschaftsgeschichte seit 1945, esp. 431–​433. 152. OECD, “A Broken Social Elevator? How to Promote Social Mobility” (OECD: Paris, 2018), 36.   https://​www.oecd-​ilibr​ary.org/​docser ​ver/​978926​4301​085-​en.pdf ?expi​res=​167​3562​ 940&id= ​ i d&accn​ ame= ​ o ci ​ d 195 ​ 6 70&check ​ sum= ​ 3 A400​ C 6E6​ 9 F65​ D 6D8​ F 42E​ 9 33C​ C919​897. 153. Katzenstein, Policy and Politics. 154. Parella and Hernandez, “The German Business Model,” 12. 155. This is analogous to a model proposed by Branko Milanovic to explain the superior quality of play in the top European football/​soccer clubs. Not only are they financially equipped to recruit the best players from around the world, those players can raise the level of their play by competing with other top players. Branko Milanovic, “Globalisation and Goals: Does Soccer Show the Way?,” Review of International Political Economy 12, no. 5 (2005): 829–​850. 156. Bertelsmann Stiftung, “Unternehmenskonzentration und Lohnquote [labor share] in Deutschland: Eine Analyse auf Branchebene zwischen 2008 und 2016,” 2018, 7. 157. Harry A. Patrinos and Suhas Parandekar, “The Educated Russian’s Curse: Returns to Education in the Russian Federation since the 1990s,” World Bank Blog, October 1, 2020, https://​blogs.worldb​ank.org/​educat​ion/​educa​ted-​russi​ans-​curse-​retu​rns-​educat​ion-​russ​ ian-​fed​erat​ion-​1990s. 158. Esther Naikal, Olga Emelyanova, Vladislava Nemova, Glenn-​Marie Lange, and Apurva Sanghi, “How Wealthy Is Russia? Measuring Russia’s Comprehensive Wealth from 2000–​ 2017,” World Bank Group, 2019. 159. Jaison R. Abel, Richard Deitz, and Yaqin Su, “Are Recent College Graduates Finding Good Jobs?,” Current Issues in Economics and Finance (New York Federal Reserve) 20, no. 1 (2014), https://​www.new​york​fed.org/​media​libr​ary/​media/​resea​rch/​cur​rent​_​iss​ues/​ci20-​1.pdf; Joseph B. Fuller et al., “Dismissed by Degrees: How Degree Inflation Is Undermining US Competitiveness and Hurting America’s Middle Class,” 2017, https://​www.hbs.edu/​ manag,ing-​the-​fut​ure-​of-​work/​Docume​nts/​dismis​sed-​by-​degr​ees.pdf; Joseph B. Fuller, Jennifer Burrowes, Manjari Raman, et al., “Bridge the Gap: Rebuilding America’s Middle Skills,” US Competitiveness Project, Harvard Business School, November 2014; Anthony P. Carnevale, Megan L. Fasules, Michael C. Quinn, and Kathryn Peltier Campbell, “Born to Win, Schooled to Lose: Why Equally Talented Students Don’t Get Equal Chances to Be All They Can Be,” Georgetown University, Center on Education and the Workforce, 2019. 160. Sean Reardon, “The Widening Academic Achievement Gap between the Rich and the Poor,” in Whither Opportunity: Rising Inequality, Schools, and Children’s Life Chances, ed. Greg J. Duncan and Richard J. Murnane (New York: Russell Sage Foundation, 2011), 91–​116. 161. Daron Acemoglu, “Why Do New Technologies Complement Skills? Directed Technical Change and Wage Inequality,” Quarterly Journal of Economics 113, no. 4 (1998): 1055–​1089; David H. Autor, David A. Mindell, Elisabeth Reynolds, and Robert M. Solow, The Work of the Future: Building Better Jobs in an Age of Intelligent Machines (Cambridge, MA: MIT Press, 2021).. 162. Claudia Goldin and Lawrence F. Katz, “The Origins of Technology-​Skill Complementarity,” Quarterly Journal of Economics 113, no. 3 (1998): 693–​732. 163. Joseph E. Stiglitz, “The Origins of Inequality, and Policies to Contain It,” National Tax Journal 68, no. 2 (2015): 430. 164. Streeck, Social Institutions, ch. 1. 165. Torben Iversen and David Soskice, “An Asset Theory of Social Policy Preferences,” American Political Science Review 95, no. 4 (December 2001): 875–​893; Torben Iversen and John D. Stephens, “Partisan Politics, the Welfare State, and Three Worlds of Human Capital Formation,” Comparative Political Studies 41, nos. 4–​5 (2008): 600–​637; Marius R. Busemeyer and Torben Iversen, “The Political Economy of Skills and Inequality,” Socio-​ economic Review 12 (2014): 241–​243; Torben Iversen and David Soskice, Democracy and Prosperity: Reinventing Capitalism through a Turbulent Century (Princeton, NJ: Princeton University Press, 2019). 166. Wolfgang Streeck, “Skills and Politics: General and Specific,” in The Political Economy of Collective Skill Formation, ed. Marius R. Busemeyer and Christine Trampusch (New York: Oxford University Press, 2011).

 



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167. Susan Neiman, Learning from the Germans: Race and the Memory of Evil (New York: Farrar, Straus and Giroux, 2019). Nazi ideology rested on a theory of the superiority of the Aryan race, although the natural hierarchy of the human races was a conventional feature of thought in many Western countries in the 19th and early 20th centuries, and certainly was widespread in the United States as well. Germany’s systematic destruction of the Jewish population of Europe—​and of many other groups the regime deemed “subhuman” also went further than efforts by other governments to kill Jews. Germany’s reckoning with its legacy of brutal colonial policies in Africa—​which included the mass killing of tens of thousands of people in what is today Namibia at the beginning of the 20th century—​has recently resulted in a formal apology, an acknowledgment that it had committed genocide, and an agreement to provide more than €1 billion to promote economic development in the country. No other colonial power has gone so far in accepting responsibility for its actions. 168. On the racial bias of recent legislative efforts by Republicans in state legislatures to suppress Black voting participation and protests by Black Lives Matter and similar movements, see Brennan Center, “Voting Laws Roundup: March 2021,” April 1, 2021, https://​www.brenna​ ncen​ter.org/​our-​work/​resea​rch-​repo​r ts/​vot​ing-​laws-​roun​dup-​march-​2021?ms=​gad​_​vot​ ing%20rights_​513381296​572_​8626​2141​33_​1​2143​0490​955&gclid=​Cj0KCQjwvYSEBh DjARIsAJMn0ljjOwjpns_​uXql7OL1MVVzeeYiCVblvzq11dJB80​NGJB​u8ec​R pxp​NcaA​ m1bE​ALw_​wcB.   Reid J. Epstein and Patricia Mazzei, “G.O.P. Bills Target Protesters (and Absolve Motorists Who Hit Them),” New York Times, April 21, 2012. 169. Lars Rensmann, “Collective Guilt, National Identity, and Political Processes in contemporary Germany,” in Lars Rensmann, ed., Collective Guilt: International Perspective, (New York: Cambridge University Press, 2004), 180. 170. Rensmann, “Collective Guilt.” 171. David de Jong, Nazi Billionaires: The Dark Histories of Germany’s Wealthiest Dynasties (New York: Mariner Books, 2022), 257. 172. De Jong, Nazi Billionaires. 173. Calculated from annual Forbes lists of wealthiest individuals, which lists citizenship. 174. De Jong, Nazi Billionaires, 233, 226. 175. Sven Beckert, Melanie Amann, and Sven Röbel, “Spur Führt zu Milliardär August von Finck,” Der Spiegel, November 23, 2018; Matthias Kremp, “Wer Is der Mysteriöse Milliardäre, der die Af D Unterstutzte Haben Soll?” Der Spiegel, November 24, 2018. 176. Von Finck died in 2021 at the age of 91. 177. Sven Beckert and Seth Rockman, “Slavery’s Capitalism,” in Slavery’s Capitalism: A New History of American Economic Development, ed. Sven Beckert and Seth Rockman (Philadelphia: University of Pennsylvania Press, 2016), 3. 178. Sven Beckert, Empire of Cotton: A Global History (New York: Vintage, 2014), 441. 179. Beckert, Empire of Cotton. 180. Beckert and Rockman, “Slavery’s Capitalism.”

Chapter 10 1. James Madison, letter to the National Gazette, [ca. January 23,] 1792. Source: https://​found​ ers.archi​ves.gov/​?q=​red​uce%20extr​eme%20wea​lth%20towa​rds%20a%20st​ate%20of%20 med​iocr​ity&s=​111​1311​111&sa=​&r=​5&sr=​. 2. Glenn Thrush, “ ‘We’re Not a Democracy,’ Says Mike Lee, a Republican Senator. That’s a Good Thing, He Adds,” New York Times, October 8, 2020.   https://​www.nyti​mes.com/​2020/​10/​08/​us/​electi​ons/​mike-​lee-​democr​acy.html. 3. Daron Acemoglu and James Robinson, Economic Origins of Dictatorship and Democracy (New York: Cambridge University Press, 2006); Carles Boix, Democracy and Redistribution (New York: Cambridge University Press, 2003); Daniel Ziblatt, Conservative Parties and the Birth of Democracy (New York: Cambridge University Press, 2017).   From John Adams to James Sullivan, May 26, 1776, Founders Online.

 

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4. https:// ​ f ound ​ e rs.archi ​ v es.gov/ ​ ? q= ​ % 22har ​ r ing ​ ton%22%20%22p ​ rope ​ r ty%20in%20l​ and%22&s=​111​1311​111&sa=​&r=​1&sr=​. Adams goes on to say: Nay I believe We may advance one Step farther and affirm that the Ballance of Power in a Society, accompanies the Ballance of Property in Land. The only possible Way then of preserving the Ballance of Power on the side of equal Liberty and public Virtue, is to make the Acquisition of Land easy to every Member of Society: to make a Division of the Land into Small Quantities, So that the Multitude may be possessed of landed Estates. If the Multitude is possessed of the Ballance of real Estate, the Multitude will have the Ballance of Power, and in that Case the Multitude will take Care of the Liberty, Virtue, and Interest of the Multitude in all Acts of Government. 5. In First Principles, Tom Ricks notes the significance of Jefferson’s language in the Declaration of Independence. The phrase “life, liberty, and the pursuit of happiness” makes explicit Jefferson’s divergence from Locke, who in his “Second Treatise on Civil Government” had used the phrase, “life, liberty and estate” (i.e., property). Jefferson here replaced that last word with “happiness”—​and in the process encouraged a social revolution. This is how Jonathan Israel summarizes the alteration: “Where in Locke property is the basis of social division into classes, Jefferson’s formulation marginalized the principle of social class. The landless could no longer be regarded as either so marginal or so subordinate as in Locke. Where Locke nurtured a negative conception of liberty, centered on protection of property, for Jeffersonians liberty was a positive, developmental concept to be upheld and advanced by the state and its agencies.”   Thomas E. Ricks, First Principles: What America’s Founders Learned from the Greeks and Romans and How That Shaped Our Country (New York: Harper, 2020), 126. 6. Acemoglu and Robinson, Economic Origins; Boix, Democracy and Redistribution. 7. Letter from John Adams to James Sullivan, May 26, 1776, emphasis added, https://​found​ers. archi​ves.gov/​docume​nts/​Adams/​06-​04-​02-​0091. In American history, the expansion of settlement across the continent eased the problem of providing land to those of European origin but at the expense of the rights of Native Americans to their ancestral lands. As with slavery and colonial conquest, therefore, the relative equality of property ownership that fostered democracy for the White population was paid for by the violent subjugation of indigenous peoples. 8. Eric Foner, The Second Founding: How the Civil War and Reconstruction Remade the Constitution (New York: Norton, 2019). 9. Eric Foner, “We Are Not Done with Abolition,” New York Times, December 15, 2020. 10. Michelle Alexander, The New Jim Crow: Mass Incarceration in the Age of Colorblindness (New York: New Press, 2010). 11. Robert A. Dahl, On Political Equality (New Haven, CT: Yale University Press, 2006), 39. 12. Keith Payne, The Broken Ladder: How Inequality Affects the Way We Think, Live, and Die (New York: Viking, 2017); Nicholas Buttrick, Samantha Heintzelman, and Shigehiro Oishi, “Inequality and Well-​Being,” Current Opinion in Psychology 18 (2017): 15–​20; Felix Cheung and Richard E. Lucas, “Income Inequality Is Associated with Stronger Social Comparison Effects: The Effect of Relative Income on Life Satisfaction,” Journal of Personality and Social Psychology 110, no. 2 (2016): 332–​341. Note that this is one reason that efforts to correlate a society’s Gini index with political dissatisfaction come up short; people’s dissatisfaction has more to do with their perceptions of their own relative status now and in the future than with their belief about how high inequality is. 13. British scholars have long called attention to the psychological and social consequences of class differences. For example, W. G. Runciman, Relative Deprivation and Social Justice: A Study of Attitudes to Social Inequality in Twentieth-​Century England (London: Routledge & Kegan Paul, 1966); Michael Marmot, The Status Syndrome: How Social Standing Affects Our Health and Longevity (New York: Macmillan, 2007); Richard G. Wilkinson and Kate Pickett, The Spirit Level: Why Greater Equality Makes Societies Stronger (New York: Bloomsbury Publishing, 2011). 14. Jan Delhey and Georgi Dragolov, “Why Inequality Makes Europeans Less Happy: The Role of Distrust, Status Anxiety, and Perceived Conflict,” European Sociological Review 30, no. 2 (2014): 151–​165.

 



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15. Meagan Flynn, “Wisconsin Chief Justice Sparks Backlash by Saying Covid-​19 Outbreak Is among Meatpacking Workers, Not ‘the Regular Folks,’” Washington Post, May 7, 2020. Most of the workers in the meatpacking facilities were of Hispanic and African American background. 16. Dennis C. Rasmussen, “Adam Smith on What Is Wrong with Economic Inequality,” American Political Science Review 110, no. 2 (2016): 342–​352. 17. Adam Smith, The Theory of Moral Sentiments, University of Oxford Text Archive, 115. 18. Adam Smith observed that we tend to identify ourselves more readily with the rich than with the poor. “The rich man glories in his riches, because . . . they naturally draw upon him the attention of the world. On the other hand, the poor man goes out and comes in unheeded.” Extreme inequality, therefore, saps both our morality and our happiness. Rasmussen, “Adam Smith,” 351–​352. 19. Boix, Democracy and Redistribution; Acemoglu and Robinson, Economic Origins. 20. Louis Menand, The Metaphysical Club: A Story of Ideas in America (New York: Farrar, Straus and Giroux, 2002), 104. 21. Foner, The Second Founding. 22. Foner, The Second Founding; Adam Winkler, We the Corporations: How American Businesses Won Their Civil Rights (New York: Liveright, 2018), 364 and passim. The Court justified its decision in Citizens United, in part, by claiming that shareholders who objected to the political contributions of corporations could readily sell their shares. This claim ignored a number of empirical realities, for example that many shareholders have no knowledge of the political activity of the corporations in which they own shares (indeed, incorporation laws make it virtually impossible to obtain this information); that many shares are owned indirectly, through investment funds; that investment funds may own shares for no more than fractions of a second; and that many shareholders are not even US citizens. Over time, the Supreme Court has affirmed a number of constitutional rights for corporations: First Amendment free speech rights; First Amendment freedom of religion rights; Fourth Amendment protections against arbitrary search and seizures; Sixth Amendment rights in court proceedings; and Eighth Amendment protections against excessive fines. Congressional Research Service, “Corporate Criminal Liability: Overview of Federal Law,” October 30, 2013. 23. Henry Cabot Lodge, “The Restriction of Immigration,” Speech in the Senate of the United States, March 16, 1896. 24. David Autor, David Dorn, Gordon Hanson, et al., “Importing Political Polarization? The Electoral Consequences of Rising Trade Exposure,” American Economic Review 110, no. 1 (2020): 3139–​3183. 25. Sabrina Tavernise and Matthew Rosenberg, “These Are the Rioters Who Stormed the Nation’s Capitol,” New York Times, May 12, 2021.   https://​w ww.nyti​mes.com/​2021/​01/​07/​us/​names-​of-​r iot​ers-​capi​tol.html?act​ion=​ click&mod​ule=​Spotli​ght&pgt​ype=​Homep​age. 26. Some call these kinds of jobs “dirty work.” Eyal Press, “America Runs on ‘Dirty Work’ and Moral Inequality,” New York Times, August 15, 2021, https://​www.nyti​mes.com/​2021/​08/​ 13/​opin​ion/​us-​dirty-​work.html. 27. A more formal discussion of this point is in Nolan McCarty, Keith T. Poole, and Howard Rosenthal, Polarized America: The Dance of Ideology and Unequal Riches, 2nd ed. (Cambridge, MA: MIT Press, 2016). 28. A considerable amount of recent political science research has confirmed the importance of these valence issues for Trump’s support, with economic issues of far lower significance. Moreover, Trump’s appeal on issues of racial and cultural identity cut across class lines, although its effect was strongest among White, working-​class voters. See Tyler T. Reny, Loren Collingwood, and Ali A. Valenzuela, “Vote Switching in the 2016 Election: How Racial and Immigration Attitudes, Not Economics, Explain Shifts in White Voting,” Public Opinion Quarterly 83, no. 1 (Spring 2019): 91–​113; Diana C. Mutz, “Status Threat, Not Economic Hardship, Explains the 2016 Presidential Vote,” PNAS [Proceedings of the National Academy of Sciences] 115, no. 19 (2018): E4330–​E4339; Alan Abramowitz and Jennifer McCoy, “United States: Racial Resentment, Negative Partisanship, and Polarization in Trump’s America,” Annals, AAPSS 681 ( January 2019): 137–​156; Jon Green and Sean McElwee, “The Differential Effects of Economic Conditions and Racial Attitudes in the Election of Donald

 

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Trump,” Perspectives on Politics 17, no. 2 (2019): 358–​379; Jesse Rhodes, Raymond La Raja, Tatishe Nteta, and Alexander Theodoridis, “Martin Luther King Jr. Was Right. Racism and Opposition to Democracy Are Linked, Our Research Finds,” Washington Post, January 17, 2022. 29. Jessica Trounstine, Segregation by Design: Local Politics and Inequality in American Cities (New York: Cambridge University Press, 2018); William Easterly, “The Middle Class Consensus and Economic Development,” Journal of Economic Growth 6, no. 4 (2001): 317–​335; Alberto Alesina, Edward Glaeser, and B. S. Sacerdote, “Why Doesn’t the US Have a European-​Style Welfare State?,” Brookings Papers on Economic Activity 2 (2001): 187–​ 277; Alberto Alesina and Edward L. Glaeser, Fighting Poverty in the US and Europe: A World of Difference (New York: Oxford University Press, 2004); Michael J. Sandel, The Tyranny of Merit: What’s Become of the Common Good? (New York: Farrar, Straus and Giroux, 2020). 30. Carol Graham and Sergio Pinto, “The Geography of Desperation in America: Labor Force Participation, Mobility, Place, and Well-​Being,” Social Science & Medicine 270 (February 2021): 113612–​113612. 31. Matthew C. MacWilliams, “Who Decides When the Party Doesn’t? Authoritarian Voters and the Rise of Donald Trump,” PS: Political Science and Politics 49, no. 4 (October 2016): 716–​ 721; Marc J. Hetherington and Jonathan D. Weiler, Authoritarianism and Polarization in American Politics (New York: Cambridge University Press, 2009). 32. A good example is the strong class cleavage dividing Americans over their willingness to be vaccinated against Covid-​19. Much more than race or income, educational level is the principal correlate of vaccination resistance. Mistrust of government drives much of the unwillingness to being vaccinated among those with lower educational attainment. A delivery truck driver commented in an interview, “When you’re in a high tax bracket, the government protects you. So why wouldn’t you trust a government that protects you?” Another woman observed of an offer by New York City to pay a $500 bonus to city workers to get vaccinated, “They are over here shoving money at us. And I’m asking, why are you so eager, when you don’t give us money for anything else?” Anita Streedhar and Anand Gopal, “Behind Low Vaccination Rates Lurks a More Profound Social Weakness,” New York Times, December 3, 2021. 33. There is a long literature on this phenomenon. Crane Brinton made it the basis for his classic study of the inexorable movement of revolutions toward ever more extreme and violent positions, and many studies of nationalism present models of outbidding by extreme nationalists against established leaders of their movement, typically on the grounds that they are sellouts. Crane Brinton, The Anatomy of Revolution (New York: Norton, 1938); Donald Horowitz, Ethnic Groups in Conflict (Berkeley: University of California Press, 1985); Barbara Walter, How Civil Wars Start: And How to Stop Them (New York: Crown, 2022). 34. On the relationship between inequality and polarization in policymaking, see McCarty, Poole, and Rosenthal, Polarized America. 35. Cf Geoffrey Kabaservice, Rule and Ruin: The Downfall of Moderation and the Destruction of the Republican Party, from Eisenhower to the Tea Party (New York: Oxford University Press, 2012); Heather Cox Richardson, To Make Men Free: A History of the Republican Party (New York: Basic Books, 2014). 36. Liliana Mason, Uncivil Agreement: How Politics Became Our Identity (Chicago: University of Chicago Press, 2018). As Mason emphasizes, as the social categories into which people sort themselves—​religious and cultural, racial, ideological, and partisan—​overlap more and more, antipathy toward the other camp rises, as do anger and activism. 37. A striking theme in many of Chris Arnade’s firsthand accounts of people in “back-​row America” is the strong sense of attachment to a familiar home environment, even when it has experienced deep decline due to the loss of jobs. Those who have stayed behind often expressed alienation from or resentment those who moved away (Chris Arnade, Dignity: Seeking Respect in Back Row America (New York: Sentinel, 2019)). 38. Sean Reardon and Kendra Bischoff, “Growth in the Residential Segregation of Families by Income, 1970–​2009,” US2010 Project, November 2011. 39. Paul Barrett, Justin Hendrix, and Grant Sims, “How Tech Platforms Fuel U.S. Political Polarization and What Government Can Do about It, “ Brookings Institution, September

 



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27, 2021, https://​www.brooki​ngs.edu/​blog/​techt​ank/​2021/​09/​27/​how-​tech-​platfo​rms-​ fuel-​u-​s-​politi​cal-​polar​izat​ion-​and-​what-​gov​ernm​ent-​can-​do-​about-​it/​; Matthew Hindman, The Internet Trap: How the Digital Economy Builds Monopolies and Undermines Democracy (Princeton, NJ: Princeton University Press, 2018); Shoshanna Zuboff, The Age of Surveillance Capitalism: The Fight for a Human Future at the New Frontier of Power (New York: Public Affairs, 2019). 40. Sheryl Gay Stolberg, “Gingrich Stuck to Caustic Path in Ethics Battles,” New York Times, January 26, 2012. 41. This effect has grown over time. The marginal effect of the Trump vote in the regression model was 11.4% as of August 2021. Also note that the percentage of the county that is classified as rural is so closely related to the Trump vote share that it drops out of the model. 42. Raj Chetty et al., “Social Capital I: Measurement and Associations with Economic Mobility,” Nature, August 1, 2022; Raj Chetty et al., “Social Capital II: Determinants of Economic Connectedness,” Nature, August 1, 2022. 43. Robert D. Putnam, Our Kids: The American Dream in Crisis (New York: Simon & Schuster, 2016). 44. 2000: 1,844; 2004: 1,591; 2008: 1,713; 2012: 1,411; 2016: 919; 2020: 899. 45. Calculated from the data from the Dave Leip US election atlas, https://​usel​ecti​onat​las.org/​ RESU​LTS/​index.html. 46. Andrew Gelman, Red State, Blue State, Rich State, Poor State: Why Americans Vote the Way They Do (Princeton, NJ: Princeton University Press, 2009). 47. In her recent book, Fiona Hill argues that the liberalizing policies of the Reagan and Thatcher eras in the United States and United Kingdom, and the 1990s in Russia, had the effect of leaving large numbers of communities devastated by deindustrialization. She writes that rebuilding “real communities and physical connections offer[s]‌the antidote to populism.” Fiona Hill, There Is Nothing for You Here: Finding Opportunity in the Twenty-​First Century, Kindle ed. (New York: Mariner Books, 2021), loc. 6083. 48. Matt Grossman and David A. Hopkins, Asymmetric Politics: Ideological Republicans and Group Interest Democrats (New York: Oxford University Press, 2016). 49. Mason, Uncivil Agreement. 50. Grossman and Hopkins, Asymmetric Politics, 11; Kathleen Hall Jamieson and Joseph N. Cappella, Echo Chamber: Rush Limbaugh and the Conservative Media Establishment (New York: Oxford University Press, 2008). 51. Alan I. Abramowitz, The Great Alignment: Race, Party Transformation, and the Rise of Donald Trump (New Haven, CT: Yale University Press, 2018); Alan I. Abramowitz, The Disappearing Center: Engaged Citizens, Polarization, and American Democracy (New Haven, CT: Yale University Press, 2011); Christopher Hare and Keith T. Poole, “The Polarization of Contemporary American Politics,” Polity 46, no. 3 (2014): 411–​429; McCarty, Poole, and Rosenthal, Polarized America. 52. Alan I. Abramowitz and Steven W. Webster, “The Ideological Foundations of Affective Polarization in the U.S. Electorate,” American Politics Research 45, no. 4 (2017): 621–​647; Abramowitz and McCoy, “United States.” 53. Mutz, “Status Threat.” 54. Runciman, Relative Deprivation. 55. From a survey conducted by the University of Massachusetts, Amherst. “UMass Amherst Poll Examines Americans’ Views of Race Issues Including Critical Race Theory, Systemic Racism and Reparations,” January 14, 2022, https://​pol​sci.umass.edu/​print/​22450. 56. Carlos Algara and Isaac Hale, “Racial Attitudes and Political Cross-​Pressures in Nationalized Elections: The Case of the Republican Coalition in the Trump Era,” Electoral Studies 68 (2020): 1–​13. 57. Cf. Walter, How Civil Wars Start; Horowitz, Ethnic Groups in Conflict. 58. Eli J. Finkel et al., “Political Sectarianism in America,” Science 370, no. 616 (2020): 533, https://​doi.org/​10.1126/​scie​nce.abe1​715. 59. Christopher H. Achen and Larry M. Bartels, Democracy for Realists: Why Elections Do Not Produce Responsive Government (Princeton, NJ: Princeton University Press, 2016). 60. Abramowitz and Webster, “Ideological Foundations.”

 

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61. C. Vann Woodward, The Strange Career of Jim Crow, 3rd ed. (New York: Oxford University Press, 2001). The sharp dispute over the degree to which the preservation of slavery itself motivated the American Revolution was manifested in a series of publications following the New York Times’ publication of the 1619 report in August 2019. A number of historians criticized the report as a tendentious misreading of the historical record. At the end of President Trump’s term in office, group of right-​wing activists released their own interpretation of American history, called the 1776 Project, under White House auspices. The report itself was largely copied from an earlier publication by one of its authors. See “The 1619 Project,” The New York Times Magazine, August 18, 2019.   https://​www.pul​itze​rcen​ter.org/​sites/​defa​ult/​files/​ful​l_​is​sue_​of_​t​he_​1​619_​proj​ect.pdf;   Letter to the Editor, “We Respond to the Historians Who Critiqued the 1619 Project,” New York Times, January 19, 2021. https://​www.nyti​mes.com/​2019/​12/​20/​magaz​ine/​we-​ resp​ond-​to-​the-​his​tori​ans-​who-​critiq​ued-​the-​1619-​proj​ect.html; The President’s Advisory 1776 Commission, “The 1776 Project,” January 2021; Tina Nguyen, “A Big Chunk of Trump’s 1776 Report Appears Lifted from an Author’s Prior Work,” Washington Post, September 17, 2020. 62. Karen Stenner, The Authoritarian Dynamic (New York: Cambridge University Press, 2005); Hetherington and Weiler, Authoritarianism and Polarization; Amanda Taub, “The Rise of American Authoritarianism,” Vox, March 1, 2016, https://​www.vox.com/​2016/​3/​1/​11127​ 424/​trump-​autho​rita​rian​ism; MacWilliams, “Who Decides.” 63. Hetherington and Weiler, Authoritarianism and Polarization; Taub, “Rise of American Authoritarianism.” 64. Timothy Snyder, “The American Abyss,” New York Times Magazine, January 11, 2021; Hannah Arendt, “Truth and Politics,” The New Yorker, February 17, 1967.” 65. Hannah Arendt, The Origins of Totalitarianism (New York: Schocken Books, 2004), 499. 66. Ron Suskind, “Without a Doubt,” New York Times Magazine, October 17, 2004. 67. MacWilliams, “Who Decides”; John W. Dean and Bob Altemeyer, Authoritarian Nightmare: Trump and His Followers (New York: Penguin Random House, 2020). In the decades since Theodor Adorno and his Frankfurt school colleagues first adumbrated the outlines of a personality type they identified as the source of political support for Naziism—​ “the authoritarian personality”—​a debate has raged over whether this syndrome is specifically characteristic of the Right. Critics of Adorno such as Edward Shils vehemently objected to this view, arguing that Stalinists were just as prone to authoritarian attitudes and behavior as Nazis. More recently, scholars such as Karen Stenner have pointed out that if we make right-​wing ideology a part of the definition of the authoritarian personality type (as does Robert Altemeyer), then we cannot use it to explain authoritarianism or distinguish it from ideological conservatism. On the other hand, there is a striking degree of covariance among the bundle of attitudes that make up what Robert Altemeyer and others term “right-​wing authoritarianism.” 68. Evan Osnos, “How Greenwich Republicans Learned to Love Trump,” New Yorker, May 3, 2020. 69. Stenner, The Authoritarian Dynamic; Hetherington and Weiler, Authoritarianism and Polarization. 70. Seymour Martin Lipset pointed out that the radical Right, responding to Joseph McCarthy’s demagoguery, reacted not only to his accusations about “creeping socialists” in the government and universities, but also his reference to the betrayal by the elites who harbored socialist tendencies, who had the best houses and best college educations. McCarthy, Lipset pointed out, was appealing to groups that “have a sense of being under-​privileged.” Seymour Martin Lipset, “The Radical Right: A Problem for American Democracy,” British Journal of Sociology 6, no. 2 (1955): 197–​198. 71. Joshua D. Wright and Victoria M. Esses, “It’s Security, Stupid! Voters’ Perceptions of Immigrants as a Security Risk Predicted Support for Donald Trump in the 2016 US Presidential Election,” Journal of Applied Social Psychology 49 (2019): 36–​49. 72. Mary Douglas and Aaron Wildavsky, Risk and Culture: An Essay on the Selection of Technical and Environmental Dangers (Berkeley: University of California Press, 1982); Mary Douglas, Purity and Danger: An Analysis of the Concept of Pollution and Taboo (London: Routledge & Kegan Paul, 1966).

 



Notes

409

73. Respondents with the highest scores on the authoritarianism index are much more likely to say that the risk to them personally from a terrorist organization such as ISIS is very high than are those low in authoritarianism (73% of the “very high” authoritarianism group vs. 45% of the “very low” said that terrorism from a group like ISIS posed a serious risk to them personally). The spread was similar for the perception of threat from Iran (57% vs. 31%). In assessing the personal risk from gun violence, however, those highest in authoritarianism were less likely than those lowest to believe the risk to be high: 42% vs. 47%; same for the worry about the personal risk from a virulent infectious disease such as Zika or Ebola—​this being well before Covid-​19: 34% vs. 21%; and the same for the personal risk from addictive prescription drugs: 33% vs. 28%. Taub, “Rise of American Authoritarianism.” 74. From Gingrich’s memo, “Language: A Key Mechanism of Control,” cited in Mason, Uncivil Agreement, 132. 75. Lauren Carroll and Linda Qiu, “Looking Back at Lie of the Year,” Politifact, The Poynter Institute, December 13, 2016.   https://​www.pol​itif​act.com/​arti​cle/​2016/​dec/​13/​look​ing-​back-​lie-​year/​. 76. Transcript: Donald Trump’s RNC Speech, August 20, 2020.   https://​www.cnn.com/​2020/​08/​28/​polit​ics/​don​ald-​trump-​spe​ech-​tra​nscr​ipt/​index.html. 77. NPR/​PBS News Hour/​Marist Poll, December 1–​6, 2020, N =​1,065; Riley E. Dunlap, Aaron M. McCright, and Jerrod H. Yarosh, “The Political Divide on Climate Change: Partisan Polarization Widens in the U.S.,” Environment: Science and Policy for Sustainable Development 58, no. 5 (2016): 4–​23; Democracy Fund +​UCLA Nationscape Project, national survey (N =​400K), reported in John Sides, Chris Tausanovitch, and Lynn Vavreck, “The Politics of COVID-​19: Partisan Polarization about the Pandemic Has Increased, but Support for Health Care Reform Hasn’t Moved at All,” Harvard Data Science Review, Special Issue 1, November 30, 2020, https://​hdsr.mitpr​ess.mit.edu/​pub/​yzcak​qc7/​rele​ase/​2. 78. Katherin Schaeffer, “A Look at the Americans Who Believe There Is Some Truth to the Conspiracy Theory That COVID-​19 Was Planned,” Pew Research Center, July 24, 2020. 79. Eric Allen Jensen, Axel Pfleger, Lisa Herbig, Brady Wagoner, Lars Lorenz, and Meike Watzlawik, “What Drives Belief in Vaccination Conspiracy Theories in Germany?,” Frontiers in Communication, Brief Research Report, May 25, 2021, https://​doi.org/​10.3389/​ fcomm.2021.678​335. 80. David De Coninck et al., “Beliefs in Conspiracy Theories and Misinformation about COVID-​ 19: Comparative Perspectives on the Role of Anxiety, Depression and Exposure to and Trust in Information Sources,” Frontiers in Psychology, April 16, 2021, https://​doi.org/​10.3389/​ fpsyg.2021.646​394. 81. Some of the more exotic conspiracy theories are detailed in Eliot Borenstein, Plots against Russia: Conspiracy and Fantasy after Socialism (Ithaca, NY: Cornell University Press, 2019). 82. “Glava VTsIOM ob"iasnil populiarnost' versii iskusstvennogo proiskhozhdeniia koronavirusa,” May 18, 2020, “Glava VTsIOM ob"iasnil populiarnost' versii iskusstvennogo proiskhozhdeniia koronavirusa.”   https://​tass.ru/​ obs​ ches​ t vo/​ 8 503​ 1 59?utm​ _ ​ sou ​rce=​bbc.com&utm ​_​m ed​ium=​refer​ ral&utm_​c​ampa​ign=​bbc.com&utm_​r​efer​rer=​bbc.com. 83. “Two in Three Russians Believe Coronavirus Is a Bioweapon,” Moscow Times, March 1, 2021, https://​www.the​mosc​owti​mes.com/​2021/​03/​01/​twit​t er-​mali​ciou​sly-​viola​tes-​russ​ian-​law-​ state-​cen​sor-​says-​a73​103. 84. T. A. Nestik, O. S. Deineke, and A. A. Maksimenko, “Sotsial’no-​psikhologicheskie Predposylki Very i Konspiralogicheskie Teorii Proiskhozhdeniia COVID-​19 i vovlechennost’ v Setevye Kommunikatsii” [Social-​psychological premises of belief in conspiracy theories for the origins of Covid-​19 and inclusion in networks of communication], Sotsial’naia Psikhologiia i Obshchestvo 114 (2020): 87–​104, https://​doi.org/​10.17759/​sps.2020​1100​407. 85. Jan-​Werner Müller, What Is Populism? (Philadelphia: University of Pennsylvania Press, 2016); Jan-​Werner Müller, Democracy Rules, Kindle ed. (New York: Farrar, Straus and Giroux, 2021). 86. Lorenza Antonucci, Laszlo Horvath, Yordan Kutiyski, et al., “The Malaise of the Squeezed Middle: Challenging the Narrative of the ‘Left Behind’ Brexiter,” Competition and Change 21, no. 3 (2017): 211–​229.

 

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87. Thomas Kurer, “The Declining MIddle: Occupational Change, Social Status, and the Populist Right,” Comparative Political Studies 53, nos. 10–​11 (2020): 1798–​1835. 88. Noam Gidron and Peter A. Hall, “Populism as a Problem of Social Integration,” Comparative Political Studies 53, no. 7 (2020): 1027–​1059. 89. Maria Greve, Michael Fritsch, and Michael Wyrwich, “Long Term Decline of Regions and the Rise of Populism: The Case of Germany,” Jena Economic Research Papers no. 2021-​006, Friedrich Schiller University, Jena, Germany, May 2021. 90. People don’t have interests; they have “ideas about interests,” to quote a classic phrase by E. E. Schattschneider, cited by Müller, Democracy Rules, loc. 1724. 91. A classic study of this is C. Vann Woodward’s book, The Strange Career of Jim Crow. 92. Karl Mannheim, Ideology and Utopia: An Introduction to the Sociology of Knowledge, trans. Louis Wirth and Edward Shils (San Diego, CA: Harcourt Brace Jovanovich, 1985). 93. According to Steven Kaplan, “A more natural interpretation is that the market for talent has driven a meaningful portion of the increase in pay at the top.” Steven N. Kaplan, “Executive Compensation and Corporate Governance in the U.S.: Perceptions, Facts, and Challenges,” NBER Working Paper 18395, September 2012, 3. Likewise, Gregory Mankiw writes that it is “natural to suspect that similar forces are at work”—​i.e., the market for skill—​in allowing a small number of highly educated and exceptionally talented individuals to command superstar incomes in ways that were not possible a generation ago.”   N. Gregory Mankiw, “Defending the One Percent,” Journal of Economic Perspectives 27, no. 3 (2013): 23, emphasis added. 94. For example, David Hope and Angelo Martelli accept without evidence the notion that top managers are able to “apply their talents to a much wider pool of resources and to reach a substantially larger audience than had been possible in previous generations.” David Hope and Angelo Martelli, “The Transition to the Knowledge Economiy, Labor Market Institutions, and Income Inequality in Advanced Democracies,” World Politics 71, no. 2 (2019): 237. Among other things, this premise ignores variation in executive pay associated with national-​level institutions. 95. From a September 2007 interview on C-​SPAN, https://​www.econom​ist.com/​free-​excha​ nge/​2007/​10/​02/​the-​great-​equali​ser-​alan-​greens​pan. 96. Abhijit V. Banerjee and Esther Duflo, Good Economics for Hard Times (New York: Public Affairs, 2019). 97. Autor et al., “Importing Political Polarization.” 98. Richard Rothstein, The Color of Law: A Forgotten History of How Our Government Segregated America (New York: Liveright, 2017), 188. 99. Kenneth Dyson, Conservative Liberalism, Liberalism, Ordo-​ liberalism, and the State (New York: Oxford University Press, 2021). 100. Gerald Berk, Louis D. Brandeis and the Making of Regulated Competition, 1900–​1932 (New York: Cambridge University Press, 2009). 101. Berk, Brandeis, 42. 102. Quoted in Ricks, First Principles, 285. 103. Ganesh Sitaraman, The Crisis of the Middle-​Class Constitution: Why Economic Inequality Threatens Our Republic (New York: Knopf, 2017), 62. 104. Sitaraman, Crisis, 84. 105. A great deal of the “institutionalist” literature in political science has been devoted to the question of the degree to which “institutions” can be prior to and independent of people’s behavior. Some have emphasized that social and economic conditions ultimately shape the institutions of a country and the degree to which they matter for the conduct of its affairs. Others think institutions can have some influence of their own so long as they correspond to patterns of strategic action that enable people to achieve their goals. A useful way of thinking about this issue is the neat aperçu of a former Brazilian government minister quoted by Adam Przeworski: “Institutions can be at most imported, never exported.” Adam Przeworski, “Institutions Matter?,” Government and Opposition 39, no. 2 (2004): 540. 106. Arindrajit Dube, Suresh Naidu, and Adam Reich, “Power and Dignity in the Low-​Wage Labor Market: Theory and Evidence from Walmart Workers,” American Economic Association, conference paper, January 7, 2022.

 



Notes

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107. Arthur M. Okun, Equality and Efficiency: The Big Tradeoff (1975; Washington, DC: Brookings Institution Press, 2015). 108. This is an old proposition in social psychology. Inequality in social status reinforces group prejudice, whereas groups that are roughly equal in status can develop mutual acceptance and a shared commitment to common values by interacting in their work, their schools, and other sites for interaction (Mason, Uncivil Agreement, 130–​131). Early studies of the psychological effects of modernization found that the experience of working together in factories helped forge common class identities out of diverse local, ethnic, and religious identities in industrializing countries. Cf. Alex Inkeles, Becoming Modern: Individual Change in Six Developing Countries (Cambridge, MA: Harvard University Press, 1974). 109. Daron Acemoglu, “AI’s Future Doesn’t Have to Be Dystopian,” Boston Review, April 14, 2021, http://​bosto​nrev​iew.net/​scie​nce-​nat​ure/​daron-​acemo​glu-​rede​sign​ing-​ai#:~:text=​ The%20di ​ rect​ i on%20of%20AI%20deve​ l opm​ e nt,if%20we%20mod​ i fy%20our%20a​ ppro​ach. 110. Paul Osterman and Beth Shulman, Good Jobs America: Making Work Better for Everyone (New York: Russell Sage Foundation, 2011); Paul Osterman, “In Search of the High Road: Meaning and Evidence,” ILR Review 7, no. 1 (2018): 3–​34. 111. Acemoglu, “AI’s Future.” 112. Thomas F. Remington, “Public-​Private Partnerships in TVET: Adapting the Dual System in the United States,” Journal of Vocational Education & Training 70, no. 4 (2018): 497–​522; Thomas F. Remington, “Institutional Challenges to Workforce Development in Maine,” Maine Policy Review 29, no. 1 (2020): 19–​28; Peter S. Goodman, “The Robots Are Coming, and Sweden Is Fine,” New York Times, December 27, 2017. 113. James J. Heckman, “Invest in Early Childhood Development: Reduce Deficits, Strengthen the Economy,” The Heckman Equation, https://​heck​mane​quat​ion.org/​resou​rce/​inv​est-​in-​ early-​childh​ood-​deve​lopm​ent-​red​uce-​defic​its-​str​engt​hen-​the-​econ​omy/​. 114. Dylan Matthews, “Senate Democrats Have a Plan That Would Cut Child Poverty Nearly in Half,” Vox, October 26, 2017, https://​www.vox.com/​pol​icy-​and-​polit​ics/​2017/​10/​ 26/​16552​200/​child-​allowa​nce-​tax-​cre​dit-​bill-​mich​ael-​ben​net-​sher​rod-​brown; H. Luke Shaever et al., “A Universal Child Allowance: A Plan to Reduce Poverty and Income Instability among Children in the United States,” RSF: The Russell Sage Foundation Journal of the Social Sciences 4, no. 3 (2018): 167–​183. 115. Christopher Wimer, Sophie Collyer, and Sara Kimberlin, “Assessing the Potential Impacts of Innovative New Policy Proposals on Poverty in the United States,” RSF: The Russell Sage Foundation Journal of the Social Sciences 4, no. 2 (February 2018): 22–​42. 116. Emmanuel Saez and Gabriel Zucman, The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay (New York: Norton, 2019); Joseph A. Stiglitz, Rewriting the Rules of the American Economy: An Agenda for Growth and Shared Prosperity (New York: Roosevelt Institute, 2015). 117. David Hope and Julian Limberg, “The Economic Consequences of Major Tax Cuts for the Rich,” LSE International Inequalities Institute Working Paper 55, December 2020; Suresh Ethan Rouen and Juan Carlos Suarez Serrato Nallareddy, “Do Corporate Tax Cuts Increase Inequality?,” NBER Working Paper 24598, May 2018. 118. Kim M. Bloomquist, “Trends as Changes in Variance: The Case of Tax Noncompliance,” IRS Research Bulletin, Rev. 11-​1003, 2003; Kim M. Bloomquist, “Tax Evasion, Income Inequality and Opportunity Costs of Compliance,” National Tax Association Proceedings (2003): 91–​ 104; Kim M. Bloomquist, “The Tax Gap: Holding Steady or Missing in Action?,” Tax Notes Federal 165, no. 4 (2019): 593–​600; Kim M. Bloomquist, “U. S. Income Inequality and Tax Evasion: A Synthesis,” Tax Notes International, July 28, 2003, 347–​367; Kim M. Bloomquist, “Regional Bias in IRS Audit Selection,” Tax Notes, March 4, 2019. The Inflation Reduction Act signed into law in August 2022 includes funding to enable the IRS to increase enforcement of tax law. 119. Lawrence H. Summers and Ed Ball, Report of the Commission on Inclusive Prosperity (Washington DC: Center for American Progress, 2015).

 

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120. Lina M. Khan, “Amazon’s Antitrust Paradox,” Yale Law Journal 126 (2017): 710–​805; Lina M. Khan and Sandeep Vaheesan, “Market Power and Inequality: The Antitrust Counterrevolution and Its Discontents,” Harvard Law and Policy Review 11 (2017): 235–​294. 121. A leading expert on antitrust law has written that “the arc of competition does not inherently bend toward equality.” Daniel A. Crane, “Antitrust and Wealth Inequality,” Cornell Law Review 101 (2016): 1210. 122. Raghuram Rajan, The Third Pillar: How Markets and the State Leave the Community Behind (New York: Penguin Press, 2019), 286. Interestingly, President Biden offered a pithy summary of the same position in his State of the Union Address on March 1, 2022: “I’m a capitalist, but capitalism without competition isn’t capitalism. Capitalism without competition is exploitation—​it drives up profits. And corporations have to compete; their profits go up and your prices go up when they don’t have to compete.” 123. Suresh Naidu, Eric Posner, and Glen Weyl, “Antitrust Remedies for Labor Market Power,” Harvard Law Review 132, no. 2 (2018): 549–​601. 124. As historian Timothy Snyder puts it, “The right to liberty implies a right to health care.” Timothy Snyder, Our Malady: Lessons in Liberty from a Hospital Diary (New York: Crown, 2020), 59. 125. Stiglitz, Rewriting the Rules. 126. Jesse Drucker and Danny Hakim, “Private Inequity: How a Powerful Industry Conquered the Tax System,” New York Times, June 12, 2021. 127. Useful sources of thinking about this issue include Zephyr Teachout, Corruption in America: From Benjamin Franklin’s Snuff Box to Citizens United (Cambridge, MA: Harvard University Press, 2014); Lawrence Lessig, Republic, Lost: How Money Corrupts Congress and a Plan to Stop It (New York: Twelve, 2012). 128. Benjamin M. Friedman, The Moral Consequences of Economic Growth (New York: Knopf, 2005).

 

INDEX

For the benefit of digital users, indexed terms that span two pages (e.g., 52–​53) may, on occasion, appear on only one of those pages.

Tables are indicated by t following the page number Abelshauser, Werner, 283 Abramowitz, Alan, 130–​31 Acemoglu, Daron, 320–​21 Adams, John, 295, 296, 317–​18 alliance of wealth and power, 8–​9, 11–​12, 64–​65, 113, 121, 128, 140–​41, 155, 158, 184, 201, 213–​14, 247–​48, 293, 302–​3, 313 Ant Group, 224–​25, 226, 241–​42 antitrust, 16, 59, 60, 61, 66, 71–​72, 73–​74, 75, 85, 87–​88, 92–​93, 101, 102–​3, 124–​25, 134, 138, 139–​40, 147–​48, 177, 261, 262–​63, 267–​68, 272, 322, 323 Arendt, Hannah, 309 Åslund, Anders, 211 authoritarian, 1, 5, 6, 26, 36, 74–​75, 123–​24, 212, 216, 219, 244–​45, 261, 266, 282, 309–​11, 312–​13, 314–​15 autocracy, 6, 216–​17, 281–​82

capital income, 15–​16, 31–​32, 38–​39, 93, 99, 241 capital share, 15, 80, 182 cartels, 71–​72, 79, 125, 256, 261, 262–​63, 264, 265, 268–​69, 316 Carter, President Jimmy, 101, 126–​27, 175, 256 CDC (Centers for Disease Control and Prevention), 2, 51 Census Bureau, 35, 36–​37, 49, 53 census tract, 51 Chamber of Commerce, 126, 128–​29, 135, 136, 139, 178–​79 Charter of the Forest, 69–​70, 153 Chernomyrdin, Viktor, 198, 207, 208 Chetty, Raj, 26–​27, 306 China Family Panel Survey, 227–​28, 235–​36 Chubais, Anatolii, 196–​97, 200–​1, 202 Citizens United, 128–​29, 135, 136–​37, 138–​39, 299 Clinton, President Bill, 73–​74, 98, 167–​68, 175 Coal and Steel Community, European, 256, 268–​69 Coase, Ronald, 67, 68–​69, 153, 212–​13 co-​determination, 270, 273–​74, 283 coefficient of elasticity, 79–​80 collective action, 66, 74, 75–​76, 84, 272 collective bargaining, 58–​59, 61, 83, 103–​5, 256, 257–​58, 268, 270–​71, 280, 283–​84, 285, 317–​18 common-​pool, 69–​70 common prosperity, 240–​43 competition law, 36, 267–​69, 283–​84. See also antitrust

Belt and Road Initiative, 223–​24, 244–​45 Berezovsky, Boris, 155, 196–​97, 202, 205–​6 Biden, President Joe, 1, 103, 301t, 305 Böhm, Franz, 262–​64 Bork, Robert, 71–​72, 73–​74, 134 Bo Xilai, 238 Brandeis, Louis, 89, 124–​25, 264, 316–​17, 323 Bretton Woods, 269–​70 Buchanan, James, 66–​68, 152 Bush President George H. W., 98, 175 Bush President George W., 98, 100, 157–​58, 167, 306–​7, 309

413

 

414 I n d e

concentration of income, 4, 7, 10, 76–​77, 98–​99, 161, 192–​93, 213–​14, 234, 236, 242, 253, 305, 314, 323 of industry, 72, 73–​74, 87–​88, 91–​93, 102, 112–​13, 114, 117, 123–​24, 165, 177, 193–​94, 197–​98, 206, 208, 209–​10, 316, 323 of power, 3–​4, 9–​10, 123–​25, 139–​40, 146–​47, 153, 181, 218, 230, 234, 244–​45, 258–​59, 261–​63, 264, 266, 267, 277–​79, 281–​82, 293 of wealth, 189, 213–​14, 240, 253–​54, 294–​95, 318 Constitutional Court (German), 258–​59, 260, 273–​74 convergence, economic, 14, 51, 52, 54, 55–​56, 234, 235–​36, 237–​38 Corporation, 42, 93, 96, 179 corruption, 48, 71, 92–​93, 97, 124–​25, 135–​36, 203–​4, 212, 213, 217, 222, 224–​25, 229–​30, 240, 244, 247–​48 Credit Suisse Global Wealth Report, 189 crony capitalism, 153–​54 Cultural Revolution, 241–​42 Dahl, Robert A., 154–​55, 297, 317–​19 Dahrendorf, Ralf, 281–​82 “deaths of despair”, 23, 24–​25, 204–​5 decile,, 26–​27, 29, 31–​32, 35, 39, 48–​49, 51, 78–​ 79, 231–​32, 253 decompose, decomposition (inequality), 14, 52–​ 53, 235–​36 democracy, 1, 3–​4, 5, 8–​9, 10, 11–​12, 21–​22, 26, 75–​76, 85–​86, 119–​21, 124–​25, 127, 144, 145–​46, 147–​48, 156–​57, 158, 217–​18, 244, 245–​46, 247–​48, 249, 255–​56, 258–​59, 276–​77, 280–​82, 293, 294–​95, 296, 314–​16, 317–​19, 322 democratization, 4, 5, 8–​9, 26, 192–​93, 214, 215–​ 16, 220, 244, 245, 246–​48, 295–​96 Deng Xiaoping, 222 deregulation, 3, 8, 61, 62, 67, 71, 85–​87, 93, 104–​ 5, 111, 124, 125–​27, 137, 139–​40, 146–​47, 157, 162–​63, 165, 177, 181–​82, 197–​98 dictatorship, 3–​4, 5, 75–​76, 262, 314–​15, 323–​24 digital technology, 11, 60, 79–​80, 86–​87, 103, 146, 158, 280, 285 Dodd-​Frank (financial reform law), 178–​79, 180, 185 “drain the pool”, 140–​41, 152, 237–​38, 323 dual education, 272–​74 Dyson, Kenneth, 266 “early winners”, 64–​65, 70–​71, 85–​86, 122–​24, 128, 187, 201, 218, 247–​48, 318 Earned Income Tax Credit (EITC), 28, 30, 49 economic liberalization, 3–​4, 5, 6–​7, 8–​9, 61, 86–​87, 191–​92, 195, 218, 244–​45, 246, 249, 270–​71

x

Economic Policy Institute (EPI), 39, 42–​43 EITC. See Earned Income Tax Credit Electoral College, 126–​27, 129, 130–​31, 304 elephant curve, 54–​55 entrepreneurship, 32–​33, 42, 58, 85–​86, 93–​94, 96, 124, 184, 187–​88, 193, 224, 229–​30, 292 Erhard, Ludwig, 253, 257–​59, 264–​65, 266–​67, 268–​69, 270–​71, 283–​84 estate tax, 98, 242 Eucken, Walter, 260–​64, 265–​66 Euripides fallacy, 47, 298 European Union (EU), 137–​38, 213–​14, 266 exponential, 39, 42 extremism, 1, 3, 5–​6, 118, 215–​16, 249, 281, 282, 303–​4, 307–​8, 310 Facebook, 60, 103, 159, 306 fairness doctrine, 145–​46, 147 Fannie Mae, 173, 175–​76 FAS (Federal Antimonopoly Service [Russia]), 207, 209–​10 fascism, 6, 63, 125, 216–​17, 316 Federal Reserve, 166–​68, 180–​81, 182–​83 Federal Trade Commission (FTC), 102–​3, 111, 113–​14, 167–​68 financialization, 8, 34, 146, 165–​72, 174, 175–​76, 181–​82, 185–​86, 228–​29, 285, 323 FIRE (finance, insurance and real estate), 96, 162, 163, 171, 177–​79, 181–​82, 285 fissuring, 109 food insecurity, 31 Freddie Mac, 173 free labor, 45, 62–​63, 175–​76 Freiburg school, 63, 263, 266–​67, 316 Friedman, Milton, 71–​72, 270–​71 Frye, Timothy, 122 FTC. See Federal Trade Commission Gaidar, Egor, 195, 197, 201, 207 GAO (Government Accountability Office), 108–​9 Gazprom, 198, 207–​8, 210–​11 geographic sorting, 147, 304, 306, 313 German Monopoly Commission (Monopolkommission), 277–​79, 290 Gingrich, Newt, 157, 173, 304, 311 Gini coefficient (or Gini index), 8, 34–​37, 53, 238, 253–​54 globalization, 3–​4, 11, 25, 38–​39, 54–​55, 76–​77, 82–​83, 85, 86–​87, 156–​57, 158, 184, 281, 284–​85, 299, 312–​13, 314 Google, 60, 103, 147–​48 Gorbachev, Mikhail, 10, 198 Gramm, Senator Phil, 30, 178 Great Recession, 19, 20, 33–​34, 160, 166–​68, 169, 175–​76, 182–​83

 



Index

Greenspan, Alan, 166–​68, 314 GSE (Government-​Sponsored Enterprises), 173, 174, 175–​77 Hacker, Jacob, 25, 31–​32 Hall, Peter, 256, 312–​13 Hayek, Friedrich, 260–​61 healthcare, 8, 16, 21–​22, 23, 24, 30, 75–​76, 81–​84, 92–​93, 96, 97–​98, 106, 107–​8, 109–​ 18, 140–​41, 151, 161–​63, 174, 177–​78, 236, 237–​38, 246–​47, 272, 288–​89, 301–​2, 319, 320, 323 Heckman, James, 322 Hellman, Joel, 122, 123 hidden income, 8, 35–​36, 48, 49 Hill, Fiona, 219 Hitler, Adolf, 249, 256, 261, 262, 263–​64, 266, 281–​82, 291–​92 hukou, 236, 237, 238–​39 human capital, 96–​98, 213–​14, 257–​58, 269, 288 IMF (International Monetary Fund), 70–​71, 170–​71, 193 incarceration, 133–​34, 148–​53, 205–​6 income labor, 15–​16, 96–​97, 192–​93, 241 income share, 9, 21, 29, 36–​37, 80, 82, 230, 232, 253, 305–​6 income tax, 28, 30–​31, 35–​36, 38–​39, 43, 93–​96, 98, 100, 133–​34, 159, 189–​91, 231–​32, 239, 241, 242 inequality income, 3, 7, 8, 14–​15, 19, 20–​21, 37, 42, 57–​ 58, 103, 105, 117, 169, 192–​93, 206, 213, 214–​15, 231–​32, 233–​34, 236, 238, 239–​40, 243, 250–​51, 253, 256, 274, 277, 288–​89, 305–​6, 312–​13 wage, 62, 91–​92, 106, 117, 182 wealth, 3, 5, 19, 20, 27, 37, 185–​86, 188, 189, 253–​54, 274 infant mortality, 115–​16 inflation, 61, 81–​83, 86, 95–​96, 105–​6, 158, 189, 193, 195, 204–​5, 209, 234, 257–​58, 269–​70, 283–​84 innovation, 10, 42, 58, 59–​60, 61, 82, 86, 89, 93–​ 94, 96, 115, 160, 161–​62, 167, 193, 201, 209, 227–​28, 263–​64, 283–​84, 285–​86, 287–​88, 292 J-​curve, 121–​22 Jim Crow, 123–​24, 233–​34, 296, 314–​15 KGB, 199, 201, 210 Khodorkovsky, Mikhail, 202, 205–​6 Koch Brothers, 128–​29, 132–​33, 141, 153–​54 Korean War, 256, 257, 265, 267 K Street, 155–​56

415

labor income, 15–​16, 96–​97, 192–​93, 241 labor market, 8, 11, 14–​16, 19, 33–​34, 37, 38–​39, 58–​59, 62–​63, 68, 71, 76, 106, 110–​11, 192, 238–​39, 270, 274, 277, 280, 289–​90, 313–​14, 322–​23 labor share, 15, 77, 80, 82–​83, 287–​88 labor unions, 58–​59, 61–​62, 67, 74–​75, 77, 84, 104–​5, 138–​39, 272 laissez-​faire, 65, 68–​69, 134–​35, 145–​46, 157–​58, 167–​68, 260–​61, 266, 313–​14, 316 Lenin, Vladimir, 9–​10, 120–​21, 261 Lerner Index, 168 liberal democracy, 3–​4, 9, 119, 293, 296 liberalization (economic), 3–​7, 8–​9, 61, 65, 70, 71, 84, 85–​87, 89, 93, 107, 121–​24, 126–​27, 176–​77, 191–​93, 195, 196, 197, 198, 201, 204–​5, 207, 212, 218, 220–​24, 227–​28, 229–​30, 232, 234, 244–​45, 246–​48, 249, 256, 257–​58, 265, 270–​71, 281, 282, 287–​88, 314–​15 life expectancy, 51, 115–​16, 204–​5, 271, 277, 304–​6 Lipset, Seymour Martin, 245 loans-​for-​shares, 196–​97, 201–​2, 208 Locke, John, 64, 68–​69 low-​wage, 32–​34, 83, 103–​4, 105, 106, 109–​10, 115, 150, 162–​63 MacLean, Nancy, 67–​68, 152 Madison, James, 294–​95, 317–​18 majority rule, 66–​67, 119–​24, 287 Mankiw, Gregory, 63–​64 Mao Zedong, 239–​40, 241–​42, 244–​45 marginal product, 41, 58–​59, 78, 79, 80, 83, 89, 106, 110 market competition, 6, 7, 9, 11–​12, 45, 61, 63, 74–​75, 78, 82, 84, 85, 87, 122, 124, 125, 158, 185–​86, 191, 197–​98, 218, 222, 226–​28, 230, 231, 247–​48, 258–​59, 260–​61, 263–​64, 291–​92, 316, 318, 322 market for talent, 16–​17, 41, 313–​14 market power, 48, 57–​59, 61–​62, 63, 67–​68, 70, 71, 72, 77, 78–​79, 80–​81, 82, 83–​84, 85–​86, 89, 92–​93, 102–​3, 104–​5, 110, 111, 112–​13, 114, 115, 117, 118, 123–​24, 125–​26, 127, 144–​45, 147–​48, 150, 165, 168, 182, 185–​ 86, 193, 206, 207, 208–​9, 222–​23, 227–​28, 258–​59, 261–​64, 267, 279, 290, 313–​14, 316, 318, 322, 323 markups, 74–​75, 78–​79, 80–​81, 82, 83, 89, 103, 111, 112, 117, 124, 229–​30, 279 Marshall Plan, 256, 269 Marx, Karl, 64, 155, 284–​85 Matthew principle, 38, 39 McGhee, Heather, 140–​41, 152, 301–​2 McKinsey Global Institute, 70–​71, 195

 

416 I n d e

median income, 18–​19, 20–​21, 22, 32, 119–​20, 141, 142, 183, 188–​89, 232, 233–​34, 250–​51, 305–​6 wealth, 18–​19 Medicare, 106–​7, 112, 113, 117, 133–​34, 146–​47, 300–​1 Medvedev, Dmitrii, 215 mergers, 61, 72, 73–​74, 79, 86, 87, 91–​92, 101, 102–​3, 112–​13, 124–​25, 165, 209–​10, 223 Merkel, Chancellor Angela, 282–​83 Mettler, Suzanne, 173–​74 middle class, 4, 19, 20–​22, 117, 127, 133–​34, 142–​ 43, 187–​89, 206, 214–​16, 217–​18, 232–​33, 242, 245–​46, 295–​96, 301–​2, 312–​13, 321, 323–​24 Milanovic, Branko, 54–​55 minimum wage, 25, 30, 82–​83, 105–​6, 157, 320 Mittelstand, 257, 269, 270, 277–​79, 283–​85 “money is speech,” 74–​75, 84, 104–​5, 135, 140, 315, 323 monopoly, 57, 59, 60, 61, 65–​66, 71–​72, 74, 75–​76, 86, 112–​13, 123–​25, 140–​41, 150, 160–​61, 176–​77, 193, 197–​98, 207–​10, 212, 218–​19, 222–​23, 227–​28, 229–​31, 243, 244–​ 45, 277–​79, 317–​18 monopsony, 58–​59, 62, 110–​11, 160–​61, 323 Müller-​Armack, Alfred, 259 national income, 15, 35, 48, 53, 77, 79–​80, 185–​ 86, 187–​88, 229–​30, 250, 251, 269, 287–​88 Nazi, 5, 63, 255–​56, 261, 262, 263–​66, 290–​92, 293, 299, 314–​15 Neiman, Susan, 290 neoliberal, neoliberalism, 61, 67, 68–​69, 72–​73, 101, 102, 117, 156–​57, 260–​61, 266, 270–​ 71, 316 network externalities, 59, 78, 159–​60 noncompete clauses, 15–​16, 82–​83, 103–​4 OECD (Organization of Economic Cooperation and Development), 16–​17, 19, 24, 78–​79, 99, 182, 213, 251, 286–​87, 288–​89 oligarchs, 85, 88, 126–​27, 153–​54, 187–​88, 189–​ 91, 196–​97, 201–​2, 203–​4, 205–​6, 208, 217–​ 19, 226, 256, 259, 266–​67, 312–​13, 316 oligarchy, oligarchic alliance, 3–​4, 120, 154–​55, 187, 213–​14, 215–​16, 224, 244–​45, 247–​48, 315 OPEC, 86, 269–​70 ordoliberal, ordoliberalism, 259–​62, 263–​64, 265–​ 69, 270–​71, 281, 282–​84, 293, 315–​16 Panama Papers, 206, 213 pandemic (Covid-​19), 2–​3, 33–​34, 109–​10, 182, 213–​14, 215–​16, 297–​98, 311–​12

x

Pandora Papers, 100–​1, 218–​19 paradigm, 3, 5, 61, 82–​83, 270, 280, 281, 282–​83, 316 Pareto, Vilfredo, 37, 39, 42, 43, 47, 68, 238, 253–​54 pass-​through businesses, 15, 42, 48–​49, 93, 94–​97, 100, 139 Philippon, Thomas, 182 Piketty, Thomas, 35–​36, 79–​80, 184 pluralism, 6–​7, 10, 145–​46, 148, 154–​55, 249, 258–​59, 281–​82, 293, 294–​95, 315, 317–​19 polarization, 2, 3, 6, 23, 24–​25, 26, 118, 152, 156–​57, 219, 281, 282, 300, 302, 303–​4, 307, 308–​9, 310, 311–​12, 317, 323–​24 political equality, 6–​7, 10, 26, 67–​68, 120–​22, 131–​32, 136, 140, 188, 294–​96, 297, 298–​99, 313, 317–​19, 322, 323–​24 poverty, 22–​23, 24, 25, 26, 30–​31, 32–​33, 50, 51, 106, 188, 215–​16, 237–​39, 246, 254–​55, 271, 277, 281, 298, 317, 322 power law, 37, 38–​39, 40–​41, 42, 45, 46, 47–​48, 147 Prigozhin, Evgenii, 218–​19 private equity, 14–​15, 83, 100, 141, 146–​47, 161–​62, 179–​80, 184 private prisons, 149–​50 privatization of social protection, 106–​10 of state assets, 49–​50, 71, 122–​23, 192–​93, 196–​202, 207–​9, 212, 213, 227–​28, 234 productivity, 10, 27, 42–​43, 60, 62, 73, 77, 79–​80, 82, 89–​91, 93, 98–​99, 100, 102–​3, 160–​61, 162–​63, 182, 195, 208, 209, 213–​14, 223, 231, 234, 258–​59, 274, 277, 288, 289–​90, 319, 320–​21 property rights, 45, 58, 60, 62–​63, 67–​68, 70–​71, 145–​46, 152–​53, 160–​61, 197–​98, 199, 200, 205–​6, 208, 212–​13, 258–​59, 293, 295–​96, 303, 313, 318, 322 property tax, 240, 242 propiska (household registration system in Russia), 192, 237 “prosperity for all”, 5–​7, 250–​55, 258–​59, 320 psychosocial stress, 25, 30, 32–​33, 204–​5 public choice, 67–​69, 70, 74, 83–​84, 152, 318–​19 public goods, 16, 25, 26, 61–​62, 67–​68, 78, 83, 87, 133–​34, 138, 140–​41, 152, 172–​73, 174, 175–​77, 181, 218, 228–​29, 237–​38, 240, 246–​48, 266, 281, 288–​89, 301–​3, 319, 320, 323–​24 privatization of, 140–​53, 184, 237–​38, 246–​47, 301–​2 Putin, President Vladimir, 5, 154, 187–​91, 203–​4​, 210, 212, 213, 214–​19, 223–​24, 238–​39, 247, 309

 



Index

qualified opportunity zones, 93, 100, 101, 103–​4, 123, 125–​27, 128, 133–​34, 139–​40, 157–​58, 165, 175, 177, 256 quantitative easing (QE), 182 racial identity, 300–​2, 308 Rajan, Raghuram, 11–​12, 323 Rawls, John, 317–​18 Reagan, President Ronald, 42, 61, 71, 73–​74, 86, 87 redistribution, 5, 18, 22–​23, 25, 26, 28–​29, 67–​68, 119, 120, 121, 157, 174, 240, 243, 247–​48, 298, 299, 302, 318 regressive, 28–​29, 38–​39, 98, 239 regulated competition, 115, 281–​82, 317 relative poverty, 24, 254–​55 rent extraction, 42, 44, 45, 61, 83, 89, 97, 117, 161–​62, 213–​14, 228 rents, 7, 8, 14–​15, 42, 45–​46, 47, 48, 49–​50, 57–​63, 64–​66, 67, 70, 72–​73, 74, 75–​84, 85–​86, 89, 92–​93, 97–​98, 104–​5, 110–​11, 114, 115, 117, 122, 123–​25, 127, 136–​37, 139–​41, 150, 151, 152, 157–​58, 159–​65, 176–​77, 182, 184, 185, 192–​94, 196, 197–​98, 203–​4, 206, 209–​10, 212, 213, 218, 221, 222–​23, 226, 227–​32, 234, 236–​37, 241, 245, 285, 287–​88, 296, 313, 319, 323–​24 rent-​seeking, 7, 8, 42, 43, 58, 66, 67–​68, 70, 71, 74–​77, 83–​84, 85–​86, 97–​98, 115, 137, 146–​ 47, 159–​60, 185, 206, 209, 229–​30, 260–​61, 290, 313, 318 Rosneft’, 203–​4, 205–​6, 211 RUIE (Russian Union of Industrialists and Entrepreneurs), 205–​6 rule of reason, 72 S & L (Savings & Loan), 139–​40, 177 S & P (Standard & Poor’s), 75, 183 Saez, Emmanuel, 15, 28–​29, 35 Sallie Mae (Student Loan Marketing Association), 173, 181 SASAC (State-​Owned Assets Supervision and Administration Commission), 226–​27, 230 Schiller, Karl, 266–​67 school choice, 141–​42 Schumpeter, Joseph, 59 S corporations, 15, 42, 44, 48–​49, 67–​68, 93–​95, 96–​98, 100, 102–​3, 135, 136–​37, 179, 299 Sechin, Igor’, 212 segregation, 6, 14, 50, 131, 153, 154–​55, 174, 314–​15 shadow banking, 180–​81, 323 shareholder value, 69–​70, 72–​73, 228–​29 shock therapy, 193–​98, 201, 222–​23

417

Sicular, Terry, 230–​31, 238 Skocpol, Theda, 129 SLABs (Student Loan Asset-​Backed Securities), 170 slavery, 6, 15–​16, 45, 52, 62–​63, 67–​68, 131, 233–​34, 292, 293, 295, 296, 314–​15, 317 Smith, Adam, 64, 298 social insurance, 25, 32, 51, 67–​68, 106–​7, 117, 133–​34, 188, 239, 243, 246, 253–​54, 256, 257, 271, 274, 280, 290, 319–​20, 323–​24 social market economy, 255–​60, 266, 270, 280–​81, 283–​84, 290, 315, 316, 320 social media, 103, 147, 244–​45, 300, 304, 308, 312 social mobility, 13, 55–​56, 253–​54, 286–​87 Social Security, 26–​27, 106–​7, 108–​9, 117, 133–​ 34, 270, 300–​1, 317–​18 SOEs (state-​owned enterprises), 191–​92, 211, 221, 222–​24, 226–​28, 230–​31, 244–​45, 247 spatial inequality, 50–​56, 233–​38 Stalin, Joseph, 62–​63, 237 Stigler, George, 66–​67, 71–​72, 74, 101 Stiglitz, Joseph, 13, 323 stock, 14–​15, 32, 39, 73, 80, 83, 91–​92, 120, 137, 138, 159–​60, 170, 172, 182–​84, 199–​201, 225, 230 Streeck, Wolfgang, 282–​83 Summers, Larry, 86–​87, 166–​67 Supreme Court, United States, 124–​25, 126, 131, 135, 136, 144, 145, 297–​98, 299 tax cuts, 4, 8, 43, 85, 93–​101, 133–​34, 157–​58, 179–​80, 322 technological change, 3–​4, 38–​39, 79–​80, 82–​83, 85, 86–​87, 104–​5, 157, 162–​63, 285, 289, 312–​13 Thatcher, Margaret, 68–​69 Tiananmen Square, 222, 244 Tobin’s Q, 89 Treuhand, 276, 277–​79 Trump, President Donald, 2, 42, 64–​65, 73–​74, 100, 103, 132, 146–​47, 152, 153–​54, 157–​58, 175, 178–​80, 185, 218–​19, 282, 299, 300–​1, 303–​4, 305–​7, 308–​10, 311, 315 Tullock, Gordon, 65–​67 TVET (Technical and Vocational Education and Training), 272–​73 Ukraine, 62–​63, 187, 189, 204, 214, 216–​17​, 218–​19, 247 University of Chicago, 66, 71–​72, 87, 101, 134–​35, 154, 322 vocational education, 246, 272, 288 See also TVET (Technical and Vocational Education and Training)

 

418 I n d e

wage premium, 61–​62, 77 wealth inequality, 3, 5, 19, 20, 27, 37, 185–​86, 188, 189, 253–​54, 274 welfare system, 31–​32, 107, 255 workforce, 31–​34, 41, 64, 77, 78–​79, 109, 116–​17, 162–​63, 184–​85, 194, 195, 223–​24, 272, 277, 283, 286–​87 World Bank, 70–​71, 213, 288 World Inequality Database (WID), 50, 251 Wu Jinglian, 63, 229–​30

x

Xi Jinping, 220, 224–​25, 238–​39, 240, 242, 244–​45, 247 Yeltsin, President Boris, 10, 155, 187, 195, 196–​97, 199, 200–​66 Yukos, 203–​4, 205–​6 Zhao Ziyang, 222 Zingales, Luigi, 11–​12, 154 Zucman, Gabriel, 15, 29, 35–​36