Chapter One of Winner-Take-All Politics

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'Winner-Take-All Politics' Book jacketAmericans like crime dramas, and for good reasons. There is an exciting discovery that immediately creates mystery. The scene has clues to pore over (increasingly, with the latest in forensic technology). Suspects are found and interrogated, their motives questioned, their alibis probed. And if the crime drama is worth its salt, there are surprises along the way—unexpected twists and turns that hopefully lead to a satisfying explanation of the once-mysterious felony.

This book starts with a mystery every bit as puzzling as that of the typical crime drama, and far more important for the lives of Americans: Why, after a generation following World War II in which prosperity was broadly distributed up and down the income ladder, did the gains of economic growth start going mostly to those at the top? Why has the economy become more risky and unreliable for most Americans even as it has created vast riches for the well-positioned and well-off? The mystery is dramatic. The scene is strewn with clues. And yet this mystery has continued to bedevil some of the nation’s finest economic detectives.

It’s not as if the post-1970s transformation of our economy has gone unnoticed, of course: Even before the economic crisis that shook the nation in 2008, scores of economists and experts in allied fields, like sociology and political science, were creatively crunching the numbers and fiercely debating their meaning. Yet again and again, they have found themselves at dead ends or have missed crucial evidence. After countless arrests and interrogations, the demise of broad-based prosperity remains a frustratingly open case, unresolved even as the list of victims grows longer.

All this, we are convinced, is because a crucial suspect has largely escaped careful scrutiny: American politics. Understandably, investigators seeking to explain a set of economic events have sought out economic suspects. But the economic suspects, for the most part, have strong alibis. They were not around at the right time. Or they were in a lot of countries, doing just the same thing that they did in the United States, but without creating an American-style winner-take-all economy.

This chapter is not the place to pin the case on American politics — or spell out exactly how American politics did it. These are tasks for the rest of this book. But we will show what a convincing solution has to look like and introduce the clues that lead us to zero in on American politics as our prime suspect. In the next chapter, we will start laying out what we mean when we say, “American politics did it.” For, as will become clear, resolving our first mystery only raises a deeper one: How, in a political system built on the ideal of political equality and in which middle-class voters are thought to have tremendous sway, has democratic politics contributed so mightily to the shift toward winner-take-all?

Investigating the Scene

As in any investigation, we cannot find the suspects unless we know more or less what happened. A body dead for twenty-four hours yields a very different set of hunches than one dead for twenty-four years. Likewise, we need to be able to characterize the winner-take-all economy in clear, simple, and empirically verifiable terms to rule certain explanations out and others in. Unfortunately, much of the discussion of our current economic state of affairs has lacked such clarity.

Indeed, most of the economic investigators have actually been looking in the wrong place. Fixated on the widening gap between skilled and unskilled workers, they have divided the economic world into two large groups: the “haves” with college or advanced degrees; the “have-nots” without them. The clues suggest, however, that the real mystery is the runaway incomes and assets of the “have-it-alls” — those on the very highest rungs of the economic ladder. These fortunate few are, in general, no better educated or obviously more skilled than those on the rungs just below, who have experienced little or none of these meteoric gains.

The mystery, further, is not just why the have-it-alls have more and more. It is also how they have managed to restructure the economy to shift the risks of their new economic playground downward, saddling Americans with greater debt, tearing new holes in the safety net, and imposing broad financial risks on Americans as workers, investors, and taxpayers. The rising rewards at the top, as startling and important as they are, are only a symptom of a broader transformation of the American economy. The deeper mystery is how our economy stopped working to provide security and prosperity for the broad middle class. The deeper mystery, the mystery that has yet to be systematically outlined or unraveled, is the rise of the winner-take-all economy.

A big reason for the continuing confusion is that the largest body of evidence on which economic investigators have traditionally relied fails to capture the crucial facts. Most of those who have asked how the poor, middle class, and rich have fared have examined national surveys of income, such as the Census Bureau’s widely used Current Population Survey — the basis for those annual summaries of income and poverty trends that appear in the news late each summer. These surveys, however, have a serious problem: They do not reach many rich people and, even when they do, do not usually show their exact incomes. (Instead, they cap the maximum amount disclosed, a practice known as top coding.) As a result, most investigators are examining the winner-take-all economy without looking at the winners at all. It is as if Lifestyles of the Rich and Famous took you on an exciting tour of the financial life of a couple making $125,000 a year (“Look: their own washer and dryer!”).

Enter two young economists who have turned the investigation upside down: Thomas Piketty and Emmanuel Saez. They are a transcontinental team — Piketty is now based at the Paris School of Economics, while Saez is at the University of California, Berkeley (both are natives of France). In 2009, at age thirty-six, Saez was awarded the John Bates Clark Medal for the economist younger than forty making the greatest contribution to the discipline. The medal was, in large part, for pathbreaking work that he and Piketty have done using income tax statistics to paint a new and revealing portrait of the distribution of economic rewards in the United States and other rich nations.1

Piketty and Saez’s approach is simple but revolutionary. Rather than talking to witnesses, the most important of whom (the rich) cannot be easily found, they scour the scene itself. More precisely, Piketty and Saez tap into a source of data that is particularly good at revealing what the have-it-alls actually have: namely, income reported when paying taxes. Information that taxpayers provide about their wages, salaries, capital gains, and other income may contain errors — and sometimes deliberate errors. But tax forms require careful documentation that income surveys don’t, and taxpayers have strong legal inducements to get the numbers right. More important, the one group that the tax code generally singles out for special scrutiny is the rich, the very people whom income surveys tend to miss. To be sure, the tax data are not without flaws, and Piketty and Saez assiduously try to correct them (for example, they adjust the results to account for the fact that some people don’t file tax returns).1 But they are enormously better than survey results in capturing the full distribution of economic rewards.

And what the Piketty and Saez evidence uniquely shows is just how sharply our economy has tilted toward winner-take-all. Most of the gains of economic growth since the 1970s have gone precisely to those that the commonly used surveys miss — not just the top 10 percent, but especially the top 1 percent, and especially the highest reaches of the top 1 percent.

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  • doggirl

    It is truely amazing to see how the middle class has lost economic gains over the past 30 years and yet have done so little to actually protect themselves.  Likewise it is amazing that Tea Party participants, most of whom are also middle class, have simply turned their back on government regulations and tax hikes for the weathy to their own detriment. Are we all just in a deep dazed denial about what is going on here?  I’m interested in reading the rest of the book to better understand how the middle class has cut its own nose to spite its face. We have obviously fallen for a lot of propaganda and manipulations.

  • Bruce Barnes

    The middle class and working poor are told that what’s
    happening to them is the consequence of Adam Smith’s “Invisible
    Hand.” This is a lie. What’s happening to them is the direct consequence
    of corporate activism, intellectual propaganda, the rise of a religious
    orthodoxy that in its hunger for government subsidies has made an idol of
    power, and a string of political decisions favoring the powerful and the
    privileged who bought the political system right out from under us.

    –Bill Moyers, 2004

     

  • KELLI2L

    ObamaNomics is the answer!  

  • KELLI2L

    . . . Can you just imagine what the salaries would be now, if all these 30 or so years the 99 or 95% would have gotten their fair slice of the American pie. . . 

    Those expensive mortgages would have been paid off for one thing;  so there would be no forclosures. . . and our economy would be in great shape too (with all that extra money for the middle class to spread around to the stores – there would be a few less Billionaires of course but that’s no big deal… They can’t possibly spend all that money anyway….  

  • http://pulse.yahoo.com/_DZPDLJAJCTTNLL4QJ3TQDIEKIY drooliethecat

    Well, what do you know?  Piketty and Saez’s completely misleading results have been exposed:

    http://blog.american.com/2012/04/obamas-inequality-argument-just-utterly-collapsed/

    How’s that class warfare working for you now? 

  • Anonymous

    That “refutation” only says that the middle class and poor, in order to show ANY gains, had to rely on social services. How is does that refute anything?!