An Ongoing Discussion: Democracy and Plutocracy

April 10, 2014

AUTHORS:

Brad DeLong

At the end of the 1970s, America undertook a grand experiment. By a relatively narrow margin Ronald Reagan’s political coalition took control, with its belief that America suffered from “too much”: too much government, too much regulation, too many gas lines, too much inflation, and too slow growth. The cure was supposed to be that if we would only let entrepreneurship and enterprise rip–and tolerate a somewhat-higher degree of income and wealth economy–we would have an acceleration of economic growth that would not only enrich the well-off, not only boost the growth rate of real GDP, but also raise general economic welfare as well. With a bigger pie, even a smaller slice would be more pie.

Thirty-five years later, it is as clear as things could be that it did not work.

After a post-World War II generation that saw real standards of living at every percentile of the income distribution double, and the relative concentration of wealth remain constant, since 1979 marvelous things have happened:

According to Saez and Zucman (2014): Back in the late 1970s…

  • …the average income–total income divided by the population–was about $40,000 in today’s purchasing power, up from $20,000 in the immediate aftermath of World War II 30 years before an compared to some $70,000 today 35 years after (growth rates of about 2.3%/year in the first and about 1.6%/year in the second).

    • …the wealth of the “Middle Rich”–those one-in-a-hundred between the 99%ile and the 99.9%ile of the wealth distribution–was 53 times U.S. average annual GDP per capita ($2.1M of today’s dollars, up from $1.2M in the late 1940s) and is about 90 times average ($6.3M) today.

  • …the wealth of the “Merely Rich”–those one-in-a-thousand between the 99.9%ile and the 99.99%ile of the wealth distribution–has gone from 167 times U.S. average annual GDP per capita ($6.7M of today’s dollars, up from $3.3M in the late 1940s) to 550 times U.S. average annual GDP per capita: $38M today.

  • …the wealth of the “Upper Rich”–those above the 99.99%ile of the wealth distribution, the top 14000, the one-in-ten-thousand–has gone from 750 times U.S. average annual GDP per capita ($30M of today’s dollars, up from $15M in the late 1940s) to 5000 times today: $350M.

For this last group, in aggregate and on average, a day in which they do not spend $50K is a day in which they grow richer without having to lift a finger…

And, with the decline of the responsiveness of the median legislative branch official to labor- and ethnoi-based pressure groups, those 14000 want to be our rulers.

An ongoing discussion:

Roland Benabou and Jean Tirole: Belief in a “Just World” and Redistributive Politics: “International surveys reveal wide differences between the views…

…held in different countries concerning the causes of wealth or poverty, and the extent to which people are responsible for their own fate. At the same time, social ethnographies and experiments by psychologists demonstrate individuals’ recurrent struggle with cognitive dissonance as they seek to maintain, and pass on to their children, a view of the world where effort ultimately pays off and everyone gets their just desserts. This paper offers a model that helps explain i) why most people feel such a need to believe in a “just world”; ii) why this need, and therefore the prevalence of the belief, varies considerably across countries; iii) the implications of this phenomenon for international differences in political ideology, levels of redistribution, labor supply, aggregate income, and popular perceptions of the poor. More generally, the paper develops a theory of collective beliefs and motivated cognitions, including those concerning “money” (consumption) and happiness, as well as religion.

“Individuals have a need to believe that they live in a world where people generally get what they deserve.”

The Belief in a “Just World”: A Fundamental Delusion [Lerner 1982].

Larry Bartels: Rich people rule!: “”Everyone thinks they know that money is important…

…in American politics. But how important?… For decades, most political scientists have sidestepped that question, because it has not seemed amenable to rigorous (meaning quantitative) scientific investigation…. Gilens and Page analyze 1,779 policy outcomes over a period of more than 20 years. They conclude that:

economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while mass-based interest groups and average citizens have little or no independent influence.

Average citizens have “little or no independent influence” on the policy-making process? This must be an overstatement of Gilens’s and Page’s findings, no? Alas, no. In their primary statistical analysis, the collective preferences of ordinary citizens had only a negligible estimated effect on policy outcomes, while the collective preferences of “economic elites” (roughly proxied by citizens at the 90th percentile of the income distribution) were 15 times as important. “Mass-based interest groups” mattered, too, but only about half as much as business interest groups–and the preferences of those public interest groups were only weakly correlated (.12) with the preferences of the public….

Gilens and Page frame their study as a test of four broad theories of American politics: “Majoritarian Electoral Democracy,” “Majoritarian Pluralism,” “Economic Elite Domination” and “Biased Pluralism.” “Majoritarian Electoral Democracy”… look[s] like a bad scientific bet…. “Majoritarian Pluralism”… assumes that most ordinary citizens will be fairly well represented in the tug-of-war among interest groups… David Truman and the early Robert Dahl…. The “Economic Elite Domination” and “Biased Pluralism” perspectives have been even less prominent in mainstream political science…. Gilens’s and Page’s analysis suggests that we need a lot more research on “Economic Elite Domination” and “Biased Pluralism”…

Kenneth Scheve and David Stasavage: Why hasn’t democracy saved us from inequality?: “why hasn’t democracy saved us from Piketty’s world of inequality?  Assuming that Piketty’s analysis is correct, and this certainly remains to be determined, here are at least four potential answers. The first… is that the rich can buy the policies they want even in a democracy…. Piketty’s empirical evidence raises questions about this explanation. The logic of r>g, combined with low taxes on capital, operates in many countries where private money plays a limited official role in politics…. The second possibility is that democracy has done little to save us from r>g because people do not fully understand how inequality is generated….

The third possibility is that trying to prevent the r>g trap is self-defeating. Taxes on wealth and income may limit growth. Also, globalization and capital mobility may make it impossible to heavily tax wealth and high incomes…. The fourth possibility is that democracies sometimes tax the rich heavily, but whether this happens depends on changing notions of fairness…. The strongest political support for heavy taxation of the rich has been during mass mobilization for war…. Today, Piketty is in effect calling for a new conscription of wealth…. The future of progressive taxation will depend on showing not just that it is necessary to curb inequality, but also that without it the rich would not be doing their fair share….”

Kenneth Scheve and David Stasavage: The Conscription of Wealth: Mass Warfare and the Demand for Progressive Taxation: “The dominant narrative of the politics of redistribution…

…in political science and economics highlights the signature role of the rise of electoral democracy and the development of political parties that mobilize working-class groups. We argue in this article that this narrative ignores the critical role played by mass warfare in the development of redistributive public policies. Focusing attention on the determinants of progressive taxation, we argue that mobilization for mass warfare led to demands for increased taxation of the wealthy to more fairly distribute the burden for the war effort. We then show empirically that during the past century, mass mobilization for war has been associated with a notable increase in tax progressivity. In the absence of war, neither the establishment of universal suffrage, nor the arrival of political control by parties of the left is systematically associated with large increases in tax progressivity. In making these arguments, we devote particular attention to a “difference-in-differences” comparison of participants and nonparticipants in World War I.

“Those who have made fortunes out of the war must pay for the war; and Labour will insist upon heavily graduated direct taxation with a raising of the exemption limit. That is what Labour means by the Conscription of Wealth.”

—Labour Party Manifesto, 1918

Adam Bonica et al.: Why Hasn’t Democracy Slowed Rising Inequality?: “During the past two generations…

…democratic forms have coexisted with massive increases in economic inequality in the United States and many other advanced democracies. Moreover, these new inequalities have primarily benefited the top 1 percent and even the top .01 percent. These groups seem sufficiently small that economic inequality could be held in check by political equality in the form of “one person, one vote.” Indeed, the notion that inequality should be at least partially self-correcting in a democracy has a long pedigree in economic theory….

We explore five possible reasons why the US political system has during the last few decades failed to counterbalance rising inequality. First, both Republicans and many Democrats have experienced an ideological shift…. Financial deregulation, in particular, has been a source of income inequality…. The mass public may well embrace such an ideological shift if rising inequality nonetheless “trickles down”…. Second, immigration and low turnout of the poor have combined to make the distribution of voters more weighted to high incomes…. Third, rising real income and wealth has made a larger fraction of the population less attracted to turning to government for social insurance…. Fourth, the rich have been able to use their resources to inflfluence electoral, legislative, and regulatory processes through campaign contributions, lobbying, and revolving door employment of politicians and bureaucrats. Fifth, the political process is distorted by institutions like gerrymandering that reduce the accountability of elected officials to the majority….

Although contributions from the Forbes 400/Fortune 500 skew somewhat to the right, a sizable percentage of their contribution dollars go to support candi- dates who are left of center…. The level of ideological diversity is apparent in the estimated ideal points of the 30 richest Americans, which are displayed above the densities. Only three of the 30–George Soros, Larry Page, and Sergey Brin–would be placed in the “progressive” wing of the Democrats. Similarly, only one of the 30, Charles Koch, is to the right of the mean Republican member of Congress…. The ideological diversity of corporate elites is not simply a function of firm-specifific incentives that would cause a fifirm to stake out an ideological position. Bipartisan boardrooms are the norm. One way a firm maintains political access is to have both high-profile Democratic donors and high-profile Republican donors within the firm. A consequence of the ideological diversity of the corporate community is to help keep the political financing system competitive for both parties, while at the same time ensuring that firms remain well connected in both parties….

Members of Congress represent the views of their high-income constituents much more than those of low-income ones… If 80 percent of high-income voters support the change, it has a 50 percent chance of passing compared to only a 32 percent chance of passing with 80 percent support from the poor…

Benjamin I. Page, Larry M. Bartels, and Jason Seawright: Democracy and the Policy Preferences of Wealthy Americans: “It is important to know what wealthy Americans seek from politics…

…and how (if at all) their policy preferences differ from those of other citizens. There can be little doubt that the wealthy exert more political influence than the less affluent do. If they tend to get their way in some areas of public policy, and if they have policy preferences that differ significantly from those of most Americans, the results could be troubling for democratic policy making. Recent evidence indicates that “affluent” Americans in the top fifth of the income distribution are socially more liberal but economically more conservative than others. But until now there has been little systematic evidence about the truly wealthy, such as the top 1 percent.

We report the results of a pilot study of the political views and activities of the top 1 percent or so of US wealth-holders. We find that they are extremely active politically and that they are much more conservative than the American public as a whole with respect to important policies concerning taxation, economic regulation, and especially social welfare programs. Variation within this wealthy group suggests that the top one-tenth of 1 percent of wealthholders (people with $40 million or more in net worth) may tend to hold still more conservative views that are even more distinct from those of the general public. We suggest that these distinctive policy preferences may help account for why certain public policies in the United States appear to deviate from what the majority of US citizens wants the government to do. If this is so, it raises serious issues for democratic theory.

April 10, 2014

AUTHORS:

Brad DeLong
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