Rebuilding An Opportunity Society: The Roles of Policy and Power

Jared BernsteinCenter on Budget and Policy Priorities

bernstein@cbpp.orgPrepared for “Work and Livable Lives” Conference

St. Louis, MO2/27/12

The Model• Normal times:Growthreduced poverty, rising living

standardsopportunitiesmobility• Inequality Wedge:Growth[ineq wedge diverts*]poverty and

wage stagnationless access to opportunitydiminished mobilityconcentrated influencemore inequalityvicious cycle

2*See Appendix A (last slide) re factors behind higher inequality.

Model, cont…• Feedback loop from unequal growth to income

concentration, and…• Power concentration • Blocks policies that would ameliorate ineq’s

impact (unions, min wg, full employment, manufacturing policy, progressive taxation, amply funded gov’t, safety net, assets!)

• Promote policies that exacerbate inequality (trickle down tax policies, deregulation of financial markets, campaign finance)

• VICIOUS CYCLE

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Evidence, Part 1: Inequality Hits Middle Incomes and Poverty

• Inequality has gone up and that has contributed to higher poverty and stagnant growth in middle-incomes.

Full employment

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“Sticky” pov rates

Source: US Census Bureau, and Mishel et al, State of Working America 5

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Evidence, Part 2: Opportunity• These dynamics have led to diminished opportunities for less advantaged

households.

Source: Whither Opportunity, Russell Sage7

Enrichment Expenditures: music and art lessons, books, sports, tutoring.

Source: Whither Opportunity? Russell Sage 8

Dif=0.45

Dif=0.31

9From Baily, Dynarski, Chapter 6, Whither Opportunity

Dynarski et al, 201110

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Evidence #3: Mobility Has Gone Down a Bit and is Relatively Low in US

Sources: Katherine Bradbury, 2011; Miles Corak, 2011 12

When the preferences of low and middle income Americans differ from those of the wealthy, “government policy appears to be fairly responsive to the well-off and virtually unrelated to the desires of low and middle income citizens.”

Evidence #4: Inequality and Political InfluenceMartin Gilens, Affluence and Influence, forthcoming:

90th 90th

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• Bartels (2005): …Senators appear to be considerably more responsive to the opinions of affluent constituents than to the opinions of middle-class constituents, while the opinions of constituents in the bottom third of the income distribution have no apparent statistical effect on their senators’ roll call votes.

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Sources: 1, Campaign Finance Institute (Senate is my calculation of moving avg); 2-4 Gilens, forthcoming

Income and Elections, Participation

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Policy Changes Implied by the Model

• Regressive tax changes, trickle down, favor capital incomes over labor (see next two slides)

• Deregulate financial markets• Privatize social insurance• Eroding labor standards (min wage, labor protections)• Diminished unionization; opposition to collective bargaining• Pro outsourcing• Monetary policy favoring low inflation over full employment• Diminished gov’t commitment to education• Eroding safety net• Anti-Keynesianism; pro austerity • Let-it-rip campaign finance• Smaller gov’t outlays as share of GDP

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Taxes and Transfers Less Effective in Reducing Inequality

Source: CBPP calculations from Congressional Budget Office data

CBO: The equalizing effect of transfers declined over the 1979–2007 period primarily because the distribution of transfers became less progressive. The equalizing effect of federal taxes also declined over the period, in part because the amount of federal taxes shrank as a share of market income and in part because of changes in the progressivity of the federal tax system.

Lowering Top Marginal Tax Rate Associates with Greater Ineq, Not Faster Growth

Source: Piketty, Saez, Stantcheva, 2011 18

Problems with the Model

•Causality: inequality clearly associated with these developments, but few causal links…

– BUT random assignment finds lasting (and “sleeper”) effects•Timing: Some of this stuff (test score gaps, “enrichment goods”) was happening before inequality took off

– BUT greater income concentration exacerbates these relations

•Mobility: It hasn’t changed much, if at all.– TRUE but it hasn’t gone up and appears to have worsened

for subgroups.

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Problems with Model, cont…

• The top 1% includes both the Koch bros and George Soros– TRUE but the former seem better organized to perpetuate

model than the latter are to reverse it. Also, self-fulfilling prophecy of gov’t failure.

• Growth “exogenous” in model– Maybe it’s not, which is all the more reason to fix this; rich

area of research.• This is all ridiculously obvious: “Them that’s got shall

get”…“There are two things important in politics…”– TRUE but the fact that something’s obvious doesn’t mean

it’s not a problem!

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How Do We Fix This??!!• Campaign finance reform• Efficient gov’t sector (inefficient gov’t also reinforces cycle)• Clear-eyed look at what’s coming and how that relates to

role of gov’t (demographics, climate, innovation, global connectedness)

• Much more intensive research and outreach agenda re trickle down, deregulatory failures

• Political dysfunction should scare people (debt ceiling)• Remember compromise?• Research is important but equally important is how we

explain, disseminate it• Fairness, common sense, YOYOs vs WITTs• What else?

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Appendix A: Main Causes of Rising Inequality

• Increased globalization, particularly import penetration from low-wage producers;

• Diminished unionization, as unions are associated with a more equitable distribution of earnings;

• Higher unemployment, which like less unionization, reduces the bargaining power of many in the workforce;

• Ongoing technological change, which increases the relative demand for more highly educated workers;

• The decline in the real value of the minimum wage;• Regressive changes in the tax code, particularly tax cuts to high marginal

income tax rates and rates on non-labor income; • Financial deregulation and “innovation” and the increased

“financialization” of industry: the increase of the financial sector as a share of economic activity and the associated growth of income sources, such as capital gains, that are concentrated at the top of the income scale.

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