Ideology, Politics, and the Concentration of Capital

John Roemer, Spring 2015

By: Prof. John Roemer, for the Spring 2015 Issue (PDF version)

Ideology, Politics, and the Concentration of CapitalWealth shares of rich families, U.S. (Source: Saez and Zucman, 2014)

In 2013, there were 160.7 million families in the US; the top 0.01% comprised 16,070 families. On average, these super-wealthy families were 1,100 times as wealthy as the average family. In 1978, the average family in the top 0.01% was ‘only’ 220 times as wealthy as the average family. In 2012, the average family wealth of the bottom 90% of the wealth distribution was $80,000 (2012 dollars); the average family wealth of the top 1% was $14,000,000. It follows that average family wealth in the US in 2012 was $212,000. Average household income was about $51,000, so the capital/income ratio in the US was approximately 4.1.

The average savings rate of the top 1% is currently about 40%. The average savings rate of the bottom 90% became negative in 1997, and it has only recently risen to about zero, due to deleveraging following the financial crisis. This savings-rate differential accounts for the massive differences in income from capital of the bottom 90% and the top 1% over this period and therefore explains the divergence of their wealth positions.

Ideology, Politics, and the Concentration of CapitalFigure 1: Wealth shares, U.S., top centile, and 90-99% cohort (Source: Saez and Zucman, 2014)

Figure 1, from Saez and Zucman (2014), shows the history of wealth concentration in the century beginning in 1913 in the US, for two groups: the top 1% and the 90-99%. Note that the share of the latter group has been roughly constant over the century, while the share of the top 1% has fluctuated. Indeed, the Great Depression and the two world wars destroyed, to a large extent, the wealth of the top 1%, which has only recently recuperated to its pre-WWI share. The 90-99% cohort, the upper middle class who comprise managerial and well-paid white collar workers, wasn’t as severely hit by the Depression and world wars: while unemployment increased massively in the 1930s, this group’s members mostly remained employed.

Ideology, Politics, and the Concentration of CapitalFigure 2: Party polarization in the U.S. House (solid line) and Senate (dashed line) in the period 1880-2005 (Source: DW-Nominate scores, McCarty, Poole, and Rosenthal, 2006)

Figure 2 shows a measure of congressional polarization during the twentieth century. The similarity of the dynamics of the top 1%’s wealth share and the degree of party polarization is remarkable: I think the former causes the latter. As the wealth of the people at the very top of the distribution increases, these families devote increasingly large amounts of wealth to activities whose purpose is to avoid the confiscation of their wealth through taxation. Because of the success of these activities, marginal income tax rates at the top of the income distribution have fallen dramatically in the United States since the 1960s. (In 1964, the top marginal rate was 77%; today, it is 39.6%.) One consequence of these efforts to protect wealth is the support, by the very wealthy, of very conservative politicians, which leads to political polarization. Wealth polarization is then reflected in polarization in the legislature.

The money spent by the very wealthy to protect their wealth from confiscation through taxation is only partially explained by their contributions to political campaigns and lobbying. Far more important is the formation of a public ideology that supports the accumulation of private wealth, and therefore, of very high incomes at the top of the income distribution. Building this ideology has involved two strategies: first, arguing that high incomes and wealth accumulation for and by the few are the engine of economic growth, and hence the increased welfare of the many, and second, arguing that, in any case, collection of wealth through taxation and its control by the state would be disastrous because of state incompetence. It’s now common for conservative American economists to argue that the marginal productivity of government expenditures is zero.

Indeed, as more data become available—data which show that almost all the growth of incomes in the past quarter century has gone to the 1%—the ‘trickle-down’ argument becomes very difficult to maintain. (From 1986 to 2012, the average annual growth rate of wealth of the bottom 90% was 0.1%, while the average annual growth rate of wealth of the top 1% was 3.9%. These numbers imply that over the 26 year period, the real wealth of the bottom 90% increased 2.6%, while the real wealth of the top 1% increased 170%!) Thus, the Right’s claims about state incompetence have become increasingly important. Indeed, this has occurred over time.

In other words, to protect wealth, it’s probably at least as important to win over the minds of voters as to place the right politicians in office with electoral manipulation through campaign financing. Spending on political campaigns and lobbying by the very wealthy only affect the political system at the point closest to legislation. Just as it’s crucial to educate a child very early, it’s critical to influence the political process at its beginning, where voter preferences are formed.

How is this ideological work carried out? Largely through the media, education, and the occasional charismatic political figure. The most important charismatic politician of the last generation was Ronald Reagan, who constantly and effectively argued for laissez-faire capitalism and attacked the state as an incompetent economic player. Even though reactionary politicians today, like Paul Ryan and Ted Cruz, advocate positions far to the right of what will be implemented through legislation, their political status lends their views respectability. The very existence of Ryan’s proposed federal budget, which would massively reduce federal expenditures benefiting the poor and middle classes and reduce taxes on the wealthy, pushes the median ideological view to the right. The clearest example of the role of media is the emergence of News Corporation, owner of Fox News, as the second-largest media group in the world in 2011. Fox News is the most popular TV news program in the US, and its political stance is far to the right. Media advertising also has a conservative effect on voters. Ads often depict the ‘typical family’ as upper-middle class, surrounded by consumer goods. This false picture of reality creates the view that, first, Americans are much better off than most of them actually are, and second, that material wealth is accessible to all in the land of opportunity. The role of education in transmitting values to youth is complex, but the key point here is that teachers’ views are critical, and these evolve in the context of the media, politics, and their own education and experience.

One institution that’s very important in terms of political influence, the media, and education is the right-wing think tank. These institutes (of which there are many) do ‘research’ to support the view that laissez-faire capitalism is optimal and that the state is inefficient, a view which they then sell to politicians and the media.1 The first such think tanks were created in the 1930s, but they proliferated in the 1970s.

It doesn’t always require money to create pro-capitalist ideology. As Marx wrote, every economic and political system creates a superstructure, a set of laws and an ideology that support the economic structure. There are various mechanisms that enable this process to occur. Here, I’ve been discussing how the wealthy deliberately create ideology, but there’s also an autonomous, perhaps evolutionary process, where ideas that are in synch with the logic of the economic mechanism proliferate, and ideas that are inimical to it are frustrated and can only survive with nurturing and conscious sustenance from the people who would benefit from them. Undoubtedly, there’s a process of cognitive dissonance that’s important on the individual level: it’s easier to believe ideas that imply you should go along with things as they are than it is to believe ideas that push you to fight the status quo. Thus, the struggle to control the concentration of wealth and power must not only confront the deliberate strategies that the very wealthy design, but it also must counteract the natural evolution of ideas which favor the dominant form of property relations.

It doesn’t always require money to create pro-capitalist ideology.

Nevertheless, the natural evolution of a superstructure supporting the extreme concentration of wealth and the use of the two strategies of the wealthy (propaganda and political finance) turn out to be insufficient for the task at hand. In the United States, they are bolstered by a third strategy, the exploitation and fomenting of racism. Since the 1960s, the Republican Party has exploited a ‘southern strategy’ to maintain its vote share. We don’t distort reality very much if we view US politics in this period as focusing on two issues: taxation and race. The tax issue involves, principally, the level of taxation and government financed services. The race issue involves integration, voting rights, educational spending on compensatory education, prison and police policies, and immigration. The salience of the ‘race issue’ for voters has made it possible for the Republican Party to maintain an approximately 50% vote share in national presidential elections, while simultaneously advocating tax policies that are in the economic interest of only the very top of the income and wealth distribution. In a word, many white voters in the US vote Republican not because of the party’s economic policies, but in spite of Republican economic policies, because they loathe the anti-racist policies that have become associated with the Democratic Party since the civil rights movement. This is most dramatically seen in southern states like Alabama (Obama’s 2012 white vote share: 15%) and Mississippi (10%). In the 2012 election, over 70% of each minority group (black, Asian, Hispanic) voted for Obama.

Thus, not only does conservative ideology maintain that extreme wealth accumulation raises all boats (and that, in any case, confiscation of wealth through taxation would be useless because of the incompetence of the state), but also the economic/tax issue is bundled with the race issue, to accrue votes from a sizable racist section of the population.2

Consider the Tea Party phenomenon. Most of the very wealthy don’t support the crazy, extreme policies of the Tea Party. Nevertheless, it’s valuable to have a segment of the Republican Party advocate these views, as it helps polarize congressional politics and prevents the passage of legislation which, although more moderate, would decrease the rate of accumulation of wealth at the top of the distribution. I conjecture that the Tea Party began as a racist, grassroots movement, but it has been sustained by financing from the very wealthy. Had the Tea Party emerged fifty years ago, it would have rapidly withered away because of a lack of financing. The very wealthy find the Tea Party useful as part of a divide-and-conquer strategy.

Mao Zedong wrote that power comes out of the barrel of a gun. This was probably the right aphorism for pre-revolutionary China. Today, in the United States, police power and the prisons are used to control the poorest and most volatile part of the population. But it isn’t right to say that power comes primarily from guns: it is exercised through wealth that is in part used to preserve itself through ideological means. Bending the perceptions and ideas of the polity so as to permit the accumulation of a vast concentration of wealth is a more subtle undertaking than controlling a population through martial law, but it is probably a more efficient strategy. In any case, political democracy is a deeply held ideological view in the advanced capitalist countries, and protection of wealth through dictatorship and guns would encounter huge resistance. (The trajectory of authoritarian control in China will be extremely interesting to watch as China becomes a richer and more educated country.)

Do we have to wait for another conflagration in this century, or can we organize instead?

Even the Occupy movement, miniscule in terms of numbers, had a perceptible effect on public consciousness of inequality and the extremes of wealth concentration. This suggests that if a social movement attacking the concentration of wealth reaches a certain critical mass, it will grow rapidly and potentially have significant political consequences. If this occurs, it will be a new historical phenomenon. As Piketty (2014) has shown us, the reduction in the power of capital in the mid-twentieth century was because of the three conflagrations mentioned earlier, not a mass social movement. Do we have to wait for another conflagration in this century, or can we organize instead?

1. Some of the most prominent conservative think tanks are the Heritage Foundation, Cato Institute, American Enterprise Institute, Ashbrook Center, Competitive Enterprise Institute, Hoover Institution, and the Manhattan Institute.

2. Lee and Roemer (2001) constructed a political model of party competition over this two-dimensional policy space, and argued that the equilibrium tax rate would be on the order of ten percentage points higher, were the US polity not infected with racism. About half of this number was due to the ‘anti-solidarity’ effect, that many white voters do not want to support transfers to the poor, whom they think are primarily black, and half is due to the ‘policy bundle’ effect, that racist policies in the election are bundled with low-tax policies.

References

Lee, W. and J. Roemer, 2006. “Racism and redistribution in the United States: A solution to the problem of American exceptionalism,” J. Public Econ. 90, 1027-1052.
McCarty, N., K. Poole, and H. Rosenthal, 2007. Polarized America: The dance of ideology and unequal riches, MIT Press.
Piketty, T. 2014. Capital in the Twentieth Century, Harvard University Press.
Saez, E. and G. Zucman, 2014. “Wealth inequality in the United States since 1913: Evidence from capitalized income tax data,” NBER Working Paper 20265.
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