summary #3

Journal of Economic Perspectives—Volume 27, Number 3—Summer 2013—Pages 103–124

DD uring the past two  generations, democratic forms have coexisted with uring the past two  generations, democratic forms have coexisted with massive increases in economic inequality in the United States and many massive increases in economic inequality in the United States and many other advanced democracies. Moreover, these new inequalities have other advanced democracies. Moreover, these new inequalities have primarily benefi ted the top 1 percent and even the top .01 percent. These groups primarily benefi ted the top 1 percent and even the top .01 percent. These groups seem suffi ciently small that economic inequality could be held in check by political seem suffi ciently small that economic inequality could be held in check by political equality in the form of “one person, one vote.”equality in the form of “one person, one vote.”

Indeed, the notion that inequality should be at least partially self-correcting Indeed, the notion that inequality should be at least partially self-correcting in a democracy has a long pedigree in economic theory. In the canonical model of in a democracy has a long pedigree in economic theory. In the canonical model of Meltzer and Richard (1981), increased inequality (in the form of median incomes Meltzer and Richard (1981), increased inequality (in the form of median incomes falling relative to average incomes) leads the median voter to demand more redistri-falling relative to average incomes) leads the median voter to demand more redistri- bution, so that politics should limit after-tax and -transfer inequality. Redistribution bution, so that politics should limit after-tax and -transfer inequality. Redistribution is limited, however, by the consequences of how the higher rates of taxation reduce is limited, however, by the consequences of how the higher rates of taxation reduce labor supply. A stripped-down version of this model, with similar implications, is labor supply. A stripped-down version of this model, with similar implications, is the model developed by Bolton and Roland (1999), where redistribution is limited the model developed by Bolton and Roland (1999), where redistribution is limited through deadweight loss in taxation. These early approaches (see also Romer 1975) through deadweight loss in taxation. These early approaches (see also Romer 1975) assume that politics is majoritarian, equal (one  person, one  vote) and with full assume that politics is majoritarian, equal (one  person, one  vote) and with full participation (all economic agents vote).participation (all economic agents vote).

Why Hasn’t Democracy Slowed Rising Inequality?

■ ■ Adam Bonica is Assistant Professor of Political Science, Stanford University, Stanford, Adam Bonica is Assistant Professor of Political Science, Stanford University, Stanford, California. Nolan McCarty is Susan Dod Brown Professor of Politics and Public Affairs, California. Nolan McCarty is Susan Dod Brown Professor of Politics and Public Affairs, Woodrow Wilson School, Princeton University, Princeton, New Jersey. Keith T. Poole is Woodrow Wilson School, Princeton University, Princeton, New Jersey. Keith T. Poole is Philip H. Alston Jr. Distinguished Professor of Political Science, University of Georgia, Philip H. Alston Jr. Distinguished Professor of Political Science, University of Georgia, Athens, Georgia. Howard Rosenthal is Professor of Politics, New York University, New York Athens, Georgia. Howard Rosenthal is Professor of Politics, New York University, New York City, New York. Their email addresses are [email protected], [email protected], City, New York. Their email addresses are [email protected], [email protected], [email protected], and [email protected]@uga.edu, and [email protected]. http://dx.doi.org/10.1257/jep.27.3.103 doi=10.1257/jep.27.3.103

Adam Bonica, Nolan McCarty, Keith T. Poole, and Howard Rosenthal

104 Journal of Economic Perspectives

Other authors, notably Benabou (2000), look at more complex and realistic Other authors, notably Benabou (2000), look at more complex and realistic environments where theory does not provide clear predictions. In economies environments where theory does not provide clear predictions. In economies where there are effi ciency gains to redistribution, there may be more support for where there are effi ciency gains to redistribution, there may be more support for redistribution at low levels of inequality than at high levels. If the 1 percent is not redistribution at low levels of inequality than at high levels. If the 1 percent is not exceptionally rich relative to the mean, the effi ciency gains may offset additional exceptionally rich relative to the mean, the effi ciency gains may offset additional taxes. But as the 1 percent get relatively richer, they turn against redistribution. taxes. But as the 1 percent get relatively richer, they turn against redistribution. In any economy, unequal turnout or political power can create a situation where In any economy, unequal turnout or political power can create a situation where the pivotal voter under majority rule may have income greater than the median. the pivotal voter under majority rule may have income greater than the median. When a society has large numbers of relatively poor residents without voting rights, When a society has large numbers of relatively poor residents without voting rights, as arises with substantial immigration, redistribution will be limited even when all as arises with substantial immigration, redistribution will be limited even when all of the enfranchised participate fully (McCarty, Poole, and Rosenthal 2006). When of the enfranchised participate fully (McCarty, Poole, and Rosenthal 2006). When these and other concerns are brought into play, many relationships between democ-these and other concerns are brought into play, many relationships between democ- racy and inequality are theoretically possible.racy and inequality are theoretically possible.

In this paper, we explore fi ve possible reasons why the US political system has In this paper, we explore fi ve possible reasons why the US political system has during the last few decades failed to counterbalance rising inequality.during the last few decades failed to counterbalance rising inequality.

First, both Republicans and many Democrats have experienced an ideological First, both Republicans and many Democrats have experienced an ideological shift toward acceptance of a form of free market capitalism which, among other shift toward acceptance of a form of free market capitalism which, among other characteristics, offers less support for government provision of transfers, lower characteristics, offers less support for government provision of transfers, lower marginal tax rates for those with high incomes, and deregulation of a number marginal tax rates for those with high incomes, and deregulation of a number of industries. Financial deregulation, in particular, has been a source of income of industries. Financial deregulation, in particular, has been a source of income inequality (Philippon and Reshef 2008). The mass public may well embrace such inequality (Philippon and Reshef 2008). The mass public may well embrace such an ideological shift if rising inequality nonetheless “trickles down” to rising incomes an ideological shift if rising inequality nonetheless “trickles down” to rising incomes and home ownership for all. In recent years, there has been a serious fi nancial and home ownership for all. In recent years, there has been a serious fi nancial crisis, declining median incomes, and declining home ownership rates. This crisis, declining median incomes, and declining home ownership rates. This raises important questions as to why these ideological trends persist and remain raises important questions as to why these ideological trends persist and remain politically powerful.politically powerful.

Second, immigration and low turnout of the poor have combined to make the Second, immigration and low turnout of the poor have combined to make the distribution of voters more weighted to high incomes than is the distribution of distribution of voters more weighted to high incomes than is the distribution of households (McCarty, Poole, and Rosenthal 2006). Turnout, of course, can also be households (McCarty, Poole, and Rosenthal 2006). Turnout, of course, can also be infl uenced by legal and administrative measures that make it relatively costly for the infl uenced by legal and administrative measures that make it relatively costly for the poor to vote.poor to vote.11

Third, rising real income and wealth has made a larger fraction of the popula-Third, rising real income and wealth has made a larger fraction of the popula- tion less attracted to turning to government for social insurance. When the insured tion less attracted to turning to government for social insurance. When the insured consumption can be self-provided at relatively low risk, there will be less support for consumption can be self-provided at relatively low risk, there will be less support for government insurance than when risk is high and private insurance markets are of government insurance than when risk is high and private insurance markets are of dubious value. There is a telling contrast between Social Security, which provides old dubious value. There is a telling contrast between Social Security, which provides old age payments for general consumption, and Medicare and the Patient Protection age payments for general consumption, and Medicare and the Patient Protection and Affordable Care Act of 2010, which cover unforeseen, potentially catastrophic, and Affordable Care Act of 2010, which cover unforeseen, potentially catastrophic, expenses for health care. Social Security does not have a strongly progressive tax expenses for health care. Social Security does not have a strongly progressive tax and benefi t structure. Attempts to increase progressivity by removing the cap on the and benefi t structure. Attempts to increase progressivity by removing the cap on the payroll tax or taxing unearned income have little political traction. By contrast, the payroll tax or taxing unearned income have little political traction. By contrast, the

1 See Alvarez, Bailey, and Katz (2008) for evidence on the disparate impact of recent tougher voter identifi cation laws on the turnout of the poor.

Adam Bonica, Nolan McCarty, Keith T. Poole, and Howard Rosenthal 105

Medicare tax on earned income was uncapped during the administration of George Medicare tax on earned income was uncapped during the administration of George H. W. Bush and raised in the 2010 health care legislation. In addition, the Patient H. W. Bush and raised in the 2010 health care legislation. In addition, the Patient Protection and Affordable Care Act imposed a 3.8 percent tax on unearned income Protection and Affordable Care Act imposed a 3.8 percent tax on unearned income of high earners. Thus, public expenditure for high-risk health care consump-of high earners. Thus, public expenditure for high-risk health care consump- tion has expanded more than expenditure for other, less-risky, forms of old age tion has expanded more than expenditure for other, less-risky, forms of old age consumption. Although the 1 percent might self-insure for health risks, the broader consumption. Although the 1 percent might self-insure for health risks, the broader population has supported social insurance in this area.population has supported social insurance in this area.

Fourth, the rich have been able to use their resources to infl uence electoral, Fourth, the rich have been able to use their resources to infl uence electoral, legislative, and regulatory processes through campaign contributions, lobbying, legislative, and regulatory processes through campaign contributions, lobbying, and revolving door employment of politicians and bureaucrats.and revolving door employment of politicians and bureaucrats.

Fifth, the political process is distorted by institutions like gerrymandering that Fifth, the political process is distorted by institutions like gerrymandering that reduce the accountability of elected offi cials to the majority. Other political insti-reduce the accountability of elected offi cials to the majority. Other political insti- tutions, including a bicameral legislature with a fi libuster, combine with political tutions, including a bicameral legislature with a fi libuster, combine with political polarization to create policy gridlock, which in turn inhibits efforts to update social polarization to create policy gridlock, which in turn inhibits efforts to update social safety nets and regulatory frameworks in response to changing conditions.safety nets and regulatory frameworks in response to changing conditions.

An Ideological Shift and Greater Polarization

Since roughly 1980, the political system has polarized (McCarty, Poole, and Since roughly 1980, the political system has polarized (McCarty, Poole, and Rosenthal 2006) with the ideological gap between Democrats and Republicans Rosenthal 2006) with the ideological gap between Democrats and Republicans widening while moderates vanish from Congress. At the same time, the Republi-widening while moderates vanish from Congress. At the same time, the Republi- cans enjoyed increased electoral success. The Democratic control of the federal cans enjoyed increased electoral success. The Democratic control of the federal government initiated with Franklin Delano Roosevelt was broken. During the government initiated with Franklin Delano Roosevelt was broken. During the 34 years from 1981–2014, the Republicans will have held the presidency for 20 years 34 years from 1981–2014, the Republicans will have held the presidency for 20 years and at least one house of Congress for 22 years. Except for a brief period in 2009, and at least one house of Congress for 22 years. Except for a brief period in 2009, the Republicans have had the 41 votes needed to sustain a Senate fi libuster.the Republicans have had the 41 votes needed to sustain a Senate fi libuster.22

Our data source for liberal–conservative positions of members of Congress are Our data source for liberal–conservative positions of members of Congress are the widely used DW-NOMINATE scores, based on roll call votes. The one-dimensional the widely used DW-NOMINATE scores, based on roll call votes. The one-dimensional implementation of DW-NOMINATE (Poole and Rosenthal 1997; McCarty, Poole, implementation of DW-NOMINATE (Poole and Rosenthal 1997; McCarty, Poole, and Rosenthal 1997; Poole 2005) assumes that legislators make choices between yea and Rosenthal 1997; Poole 2005) assumes that legislators make choices between yea and nay outcomes on a roll call vote as a function of the distance between the legis-and nay outcomes on a roll call vote as a function of the distance between the legis- lator’s “ideal point” on the liberal–conservative dimension and the locations of the lator’s “ideal point” on the liberal–conservative dimension and the locations of the outcomes. The “spatial utility” a legislator assigns to an outcome is a Gaussian func-outcomes. The “spatial utility” a legislator assigns to an outcome is a Gaussian func- tion of the distance between the outcome and that legislator’s ideal point on the tion of the distance between the outcome and that legislator’s ideal point on the liberal–conservative dimension. The total utility of the outcome is the spatial utility liberal–conservative dimension. The total utility of the outcome is the spatial utility plus a random, normally distributed component. The legislators’ “ideal points” and plus a random, normally distributed component. The legislators’ “ideal points” and the outcome components are estimated simultaneously from roll call votes. The the outcome components are estimated simultaneously from roll call votes. The

2 In addition, a majority of the Supreme Court has been appointed by Republican presidents since 1970. Over time, some Republican Supreme Court appointees such as Earl Warren, John Paul Stephens, and David Souter often voted with Democratic appointees. However, there has been a conservative majority on the court since 1982 according to a scoring system developed by political scientists Andrew Martin and Kevin Quinn and available at http://www.targetpointconsulting.com/scotusscores-labels.html.

106 Journal of Economic Perspectives

average ideal point of a legislator is constrained to lie in a continuum from – 1 (far average ideal point of a legislator is constrained to lie in a continuum from – 1 (far left) to left) to ++ 1 (far right). 1 (far right).

Polarization is measured as the distance between the average ideal point of Polarization is measured as the distance between the average ideal point of Republican legislators and that of Democrats. (Results are similar for other measures Republican legislators and that of Democrats. (Results are similar for other measures of dispersion, such as the variance of ideal points.) Overlapping cohorts of legisla-of dispersion, such as the variance of ideal points.) Overlapping cohorts of legisla- tors permit measurements that are comparable across time.tors permit measurements that are comparable across time.33

As Figure 1 shows, most of the polarization for the House of Representatives As Figure 1 shows, most of the polarization for the House of Representatives has been produced by a rightward movement of Republicans. The pattern for the has been produced by a rightward movement of Republicans. The pattern for the Senate is similar. More precisely, entering Republicans like Ted Cruz have tended to Senate is similar. More precisely, entering Republicans like Ted Cruz have tended to vote to the right of continuing members, and exiting members like Olympia Snowe vote to the right of continuing members, and exiting members like Olympia Snowe have been relatively moderate. Republicans have become sharply more conserva-have been relatively moderate. Republicans have become sharply more conserva- tive. The slight liberal drift of the Democrats is compositional in nature. Moderate tive. The slight liberal drift of the Democrats is compositional in nature. Moderate Democrats from the South have been replaced by conservative Republicans. The Democrats from the South have been replaced by conservative Republicans. The few remaining southern Democrats are now heavily African-American, representing few remaining southern Democrats are now heavily African-American, representing minority-majority districts. The change has made for a smaller, more liberal group minority-majority districts. The change has made for a smaller, more liberal group of southern Democrats. However, Democrats as a whole have not moved much to of southern Democrats. However, Democrats as a whole have not moved much to the left. Overall, entering and exiting Democrats have looked much like those that the left. Overall, entering and exiting Democrats have looked much like those that have continued to serve.have continued to serve.

3 Legislator ideal points are restricted to linear trends throughout the legislator’s career. For example, a legislator can trend from liberal to conservative but cannot go back and forth.

Figure 1 Party Means on Liberal–Conservative Dimension for the US House of Representatives, 1879–2012

Source: Author’s calculations using DW-NOMINATE scores of the liberal–conservative positions of members of Congress, which are based on roll call votes. For methodological details, see Poole and Rosenthal 1997; McCarty, Poole, and Rosenthal 1997; and Poole 2005.

1879 1893 1907 1921 1935 1949 1963 1977 1991 2005

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Why Hasn’t Democracy Slowed Rising Inequality? 107

Our fi ndings do not, however, suggest that the Democrats continue to support Our fi ndings do not, however, suggest that the Democrats continue to support policies that would reduce inequality as much as they did in the New Deal. After all, policies that would reduce inequality as much as they did in the New Deal. After all, nineteenth-century Democrats, centered on populist southern whites, supported nineteenth-century Democrats, centered on populist southern whites, supported railroad regulation and antitrust legislation, and in this sense were to the economic railroad regulation and antitrust legislation, and in this sense were to the economic left of current Democrats. The Democratic party pushed through the fi nancial left of current Democrats. The Democratic party pushed through the fi nancial regulation of the 1930s, while the Democratic party of the 1990s undid much of regulation of the 1930s, while the Democratic party of the 1990s undid much of this legislation in its embrace of unregulated fi nancial capitalism, including the this legislation in its embrace of unregulated fi nancial capitalism, including the Interstate Banking and Branching Effi ciency Act of 1993, which eliminated previous Interstate Banking and Branching Effi ciency Act of 1993, which eliminated previous restrictions on interstate banking and branching; the Gramm–Leach–Bliley Act of restrictions on interstate banking and branching; the Gramm–Leach–Bliley Act of 1999, which1999, which repealed the 1933 Glass–Steagall Act that had separated commercial repealed the 1933 Glass–Steagall Act that had separated commercial banking from other fi nancial services; and the Commodity Futures Modernization banking from other fi nancial services; and the Commodity Futures Modernization Act of 2000, which prevented the Commodity Futures Trading Commission from Act of 2000, which prevented the Commodity Futures Trading Commission from regulating most over-the-counter derivative contracts, including credit default swaps.regulating most over-the-counter derivative contracts, including credit default swaps.

There appears to have been a substantial change in how issues of market regu-There appears to have been a substantial change in how issues of market regu- lation and fi scal policy have mapped onto the relatively stable ideological positions lation and fi scal policy have mapped onto the relatively stable ideological positions of Democratic members of Congress. What makes a legislator liberal or conserva-of Democratic members of Congress. What makes a legislator liberal or conserva- tive evolves over time. Part of the changed mapping is found in the Democrats’ tive evolves over time. Part of the changed mapping is found in the Democrats’ embrace of environmental protection, a public and normal good where demand is embrace of environmental protection, a public and normal good where demand is likely to increase with income. Similarly, in a quantitative analysis of party platforms, likely to increase with income. Similarly, in a quantitative analysis of party platforms, Geering (1998) has documented that the Democratic agenda has shifted away from Geering (1998) has documented that the Democratic agenda has shifted away from general social welfare to policies that target ascriptive identities of race, ethnicity, general social welfare to policies that target ascriptive identities of race, ethnicity, gender, and sexual orientation.gender, and sexual orientation.

The extent of political polarization, as measured by the average difference The extent of political polarization, as measured by the average difference between the parties, is positively correlated with the extent of inequality. Figure 2 between the parties, is positively correlated with the extent of inequality. Figure 2 shows the dramatic increases in the difference between the mean Republican and shows the dramatic increases in the difference between the mean Republican and the mean Democrat in the House. Again, results for the Senate are very similar. The the mean Democrat in the House. Again, results for the Senate are very similar. The fi gure also shows that polarization and income inequality track each other closely fi gure also shows that polarization and income inequality track each other closely over the past 100 years; indeed, when this measure of political polarization is lagged over the past 100 years; indeed, when this measure of political polarization is lagged ten years, thus making it a leading indicator, its correlation with the income share ten years, thus making it a leading indicator, its correlation with the income share of the top 1 percent exceeds 0.9. of the top 1 percent exceeds 0.9. 44

This correlation raises questions of cause and effect. What causes increased This correlation raises questions of cause and effect. What causes increased political polarization? How might greater political polarization reduce the efforts of political polarization? How might greater political polarization reduce the efforts of government to push back against greater income inequality? These are important government to push back against greater income inequality? These are important questions for research. In later sections of this paper, we will discuss the arguments questions for research. In later sections of this paper, we will discuss the arguments suggesting that lower support for policies that would infl uence inequality may result suggesting that lower support for policies that would infl uence inequality may result from an increase in polarization coupled with a greater adherence to free-market from an increase in polarization coupled with a greater adherence to free-market ideology, which is in turn supported by campaign contributions from the rich.ideology, which is in turn supported by campaign contributions from the rich.

4 Polarization is not only a phenomenon at the federal level. Shor and McCarty (2011) show that many state legislatures are as polarized as Congress and have become more polarized over the last 15 years. Controlling for region, there is also a statistically signifi cant cross-sectional correlation between state legislative polarization and the 80/20 wage ratio. Also see Garand (2010) for evidence that income inequality at the state level is correlated with the voting of US senators.

108 Journal of Economic Perspectives

But clearly, efforts to reduce inequality are not especially popular. For example, But clearly, efforts to reduce inequality are not especially popular. For example, Barack Obama campaigned in 2008 and again in 2012 to raise marginal tax rates Barack Obama campaigned in 2008 and again in 2012 to raise marginal tax rates only on the relatively small slice of households earning over $250,000 and eventu-only on the relatively small slice of households earning over $250,000 and eventu- ally in early 2013 accepted increases for only the tiny sliver of households (fi ling ally in early 2013 accepted increases for only the tiny sliver of households (fi ling joint returns) at $450,000 and above. There has been no groundswell of political joint returns) at $450,000 and above. There has been no groundswell of political support for sharp reforms of the fi nancial sector, nor for actions to reduce mortgage support for sharp reforms of the fi nancial sector, nor for actions to reduce mortgage foreclosures substantially, nor for expanding investment in the human capital of foreclosures substantially, nor for expanding investment in the human capital of children from low-income households.children from low-income households.

It’s important to remember that the left-to-right political spectrum described It’s important to remember that the left-to-right political spectrum described here involves many issues, not just economic ones. When Democrats have won elec-here involves many issues, not just economic ones. When Democrats have won elec- tions, their victory has been due in large part to voters’ concerns about issues other tions, their victory has been due in large part to voters’ concerns about issues other than redistribution to the poor. Such issues might include the environment, foreign than redistribution to the poor. Such issues might include the environment, foreign policy (Iraq), and identity issues for women and the lesbian, gay, and transgender policy (Iraq), and identity issues for women and the lesbian, gay, and transgender communities. Arguably, the electoral success of the Democrats in 2006 and 2008 communities. Arguably, the electoral success of the Democrats in 2006 and 2008 owed more to the Bush administration’s Iraq policy than to redistributive policies owed more to the Bush administration’s Iraq policy than to redistributive policies espoused by Democrats.espoused by Democrats.

Voters and citizens also tend to make clear distinctions among the holders Voters and citizens also tend to make clear distinctions among the holders of wealth based on how it was acquired. To the extent that public furor is of wealth based on how it was acquired. To the extent that public furor is directed against the 1 percent, it is largely directed against the fi nancial sector. directed against the 1 percent, it is largely directed against the fi nancial sector. We had Occupy Wall Street, but no Occupy Silicon Valley or Occupy Walmart. We had Occupy Wall Street, but no Occupy Silicon Valley or Occupy Walmart. Political animus toward the 1  percent is largely directed at those perceived Political animus toward the 1  percent is largely directed at those perceived to have caused direct harm to the general public, like executives from major to have caused direct harm to the general public, like executives from major fi nancial institutions and BP. Rage is accentuated when the malefactors are fi nancial institutions and BP. Rage is accentuated when the malefactors are

Figure 2 Top 1 Percent Income Share and Polarization in the US House of Representatives, 1913 –2008

Source: Authors calculations using the polarization data described under Figure 1, and data on income from Piketty and Saez (2013).

D istan

ce b etw

een th

e p arties

T o

p o

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1913 1922 1931 1940 1949 1958 1967 1976 1985 1994 2003

Polarization

Top 1% income share

R = .69 Polarization vs. Income

.4

.5

.6

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R = .91 Polarization vs. Income

1945–2011

Adam Bonica, Nolan McCarty, Keith T. Poole, and Howard Rosenthal 109

perceived to benefi t from taxpayer money, as in the TARP and AIG bailouts of perceived to benefi t from taxpayer money, as in the TARP and AIG bailouts of 2008 (McCarty, Poole, and Rosenthal 2013). But there is no widespread sense 2008 (McCarty, Poole, and Rosenthal 2013). But there is no widespread sense that high incomes are illegitimate per se. Executive compensation went essen-that high incomes are illegitimate per se. Executive compensation went essen- tially unscathed in the Dodd–Frank fi nancial regulation legislation passed in tially unscathed in the Dodd–Frank fi nancial regulation legislation passed in 2010. Entrepreneurial wealth derived from providing valued goods and services 2010. Entrepreneurial wealth derived from providing valued goods and services is admired, even revered.is admired, even revered.

Hard evidence on mass public attitudes toward the 1  percent is thin. But a Hard evidence on mass public attitudes toward the 1  percent is thin. But a 60 Minutes/60 Minutes/Vanity Fair poll in July 2010 asked, “Which one of the following profes- poll in July 2010 asked, “Which one of the following profes- sions do you think most deserves the large salaries its members receive?” The sions do you think most deserves the large salaries its members receive?” The responses from 1,167 telephone interviews were: Bankers, 12 percent; Professional responses from 1,167 telephone interviews were: Bankers, 12 percent; Professional athletes, 15 percent; Film stars, 9 percent, Lobbyists, 5 percent, Internet entre-athletes, 15 percent; Film stars, 9 percent, Lobbyists, 5 percent, Internet entre- preneurs, 33 percent; None of the above (an unsolicited, volunteered response), preneurs, 33 percent; None of the above (an unsolicited, volunteered response), 14  percent; and Don’t know/ No answer, 15  percent. In short, Internet entrepre-14  percent; and Don’t know/ No answer, 15  percent. In short, Internet entrepre- neurs, who populate far more of the Forbes 400 wealthiest Americans than athletes, neurs, who populate far more of the Forbes 400 wealthiest Americans than athletes, fi lm stars, and lobbyists, are viewed as deserving. Even bankers, less than two years fi lm stars, and lobbyists, are viewed as deserving. Even bankers, less than two years after the collapse of fi nancial markets, found some support. The framing of the after the collapse of fi nancial markets, found some support. The framing of the question limits what we can draw from the responses —“Who most deserves . . . ?” question limits what we can draw from the responses —“Who most deserves . . . ?” allows for the interpretation that none deserve it very much. But at least we can say allows for the interpretation that none deserve it very much. But at least we can say that these responses are hardly a smoking gun of widespread public resentment that these responses are hardly a smoking gun of widespread public resentment over rising income inequality.over rising income inequality.

However, there are some tantalizing linkages from our measure of political However, there are some tantalizing linkages from our measure of political polarization to the fi nancial sector. Figure 3 shows that political polarization tracks polarization to the fi nancial sector. Figure 3 shows that political polarization tracks

Figure 3 Polarization in the House of Representatives, and Relative Wage and Education in Financial Services Sector, 1909 –2006

Source: Authors calculations using the political polarization data described under Figure 1, and fi nancial data from Philippon and Reshef (2008). Note: Figure 3 shows that political polarization in the US House of Representatives tracks wages and educational levels in the fi nancial sector relative to the remainder of the economy.

D is

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et w

ee n

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elative w age an

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1909 1918 1927 1936 1945 1954 1963 1972 1981 1990 1999

Polarization

Wages Education

0.5

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1.0

1

1.175

1.35

1.525

1.7

R = .87 Polarization vs.

Relative Education in Finance

R = .65 Polarization vs.

Relative Wage in Finance

R = .93 Polarization vs.

Relative Wage in Finance 1945–2006

110 Journal of Economic Perspectives

wages and educational levels in the fi nancial sector relative to the remainder of wages and educational levels in the fi nancial sector relative to the remainder of the economy. (Again, the correlation of polarization between both of these series the economy. (Again, the correlation of polarization between both of these series is maximized at 0.9 by lagging polarization by 10  years.) Philippon and Resheff is maximized at 0.9 by lagging polarization by 10  years.) Philippon and Resheff (2008) in turn show that these fi nancial variables go hand in hand with fi nancial (2008) in turn show that these fi nancial variables go hand in hand with fi nancial deregulation; that is, a deregulated fi nancial sector attracts those with more educa-deregulation; that is, a deregulated fi nancial sector attracts those with more educa- tion, who in turn are paid a higher wage. The top 1 percent contains a sizable share tion, who in turn are paid a higher wage. The top 1 percent contains a sizable share of individuals from the fi nancial sector. Thus, a set of interconnections seem to exist of individuals from the fi nancial sector. Thus, a set of interconnections seem to exist here between political polarization, policy choices affecting the fi nancial sector, and here between political polarization, policy choices affecting the fi nancial sector, and greater inequality as one outcome of those policy choices.greater inequality as one outcome of those policy choices.

Voting Participation and Inequality

If those with lower incomes are less likely to vote, then the political system will If those with lower incomes are less likely to vote, then the political system will be less responsive to a rise in inequality. The relationship between voter turnout be less responsive to a rise in inequality. The relationship between voter turnout and income (and citizenship) is shown in Figure  4 for the 2008 presidential and and income (and citizenship) is shown in Figure  4 for the 2008 presidential and 2010 midterm elections. The data is drawn from the large samples in the November 2010 midterm elections. The data is drawn from the large samples in the November Current Population Survey, which asks questions on citizenship, turnout of citizens, Current Population Survey, which asks questions on citizenship, turnout of citizens,

Figure 4 Voter Turnout by Household Income and Citizenship, 2008 and 2010

Source: Current Population Survey (2008:N=80,443; 2010:N=101,338). Note: Figure 4 shows the relationship between voter turnout and voter household income and citizenship for the 2008 presidential and 2010 midterm elections.

2008 2010

$0–5k $5–7.5k

$7.5–10k

$10–12.5k

$12.5–15k

$15–20k

$20–25k

$25–30k

$30–35k

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$40–50k

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$75–100k

$100–150k

>$150k Household income

100%

$0–5k $5–7.5k

$7.5–10k

$10–12.5k

$12.5–15k

$15–20k

$20–25k

$25–30k

$30–35k

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$40–50k

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75%

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Voter Nonvoter Noncitizen

Why Hasn’t Democracy Slowed Rising Inequality? 111

and household income.and household income.55 In the fi gure, the dark grey bars at the top represent the In the fi gure, the dark grey bars at the top represent the voters; the black bars in the middle, nonvoting citizens; and the light grey bars at voters; the black bars in the middle, nonvoting citizens; and the light grey bars at the bottom, noncitizens.the bottom, noncitizens.

Two effects are worth noting. First, higher fractions of the poor are noncitizens. Two effects are worth noting. First, higher fractions of the poor are noncitizens. Second, among the poor who are citizens, turnout is very low. Fewer than half the Second, among the poor who are citizens, turnout is very low. Fewer than half the households with incomes under $15,000 reported voting in the presidential elec-households with incomes under $15,000 reported voting in the presidential elec- tion of 2008, even though turnout of the poor increased over the 2000 level (shown tion of 2008, even though turnout of the poor increased over the 2000 level (shown in McCarty, Poole, and Rosenthal 2006, fi gure  4.1.) In contrast, over four-fi fths in McCarty, Poole, and Rosenthal 2006, fi gure  4.1.) In contrast, over four-fi fths of those with incomes over $150,000 reported voting. The contrast is greater for of those with incomes over $150,000 reported voting. The contrast is greater for midterm elections. Turnout for the 2010 midterm election decreased only slightly midterm elections. Turnout for the 2010 midterm election decreased only slightly from levels in 2008 for top incomes but decreased substantially for those with house-from levels in 2008 for top incomes but decreased substantially for those with house- hold incomes below $15,000 so that only about one-third of that group reported hold incomes below $15,000 so that only about one-third of that group reported voting. In 2008, those reporting incomes above $150,000 represented 9.9 percent of voting. In 2008, those reporting incomes above $150,000 represented 9.9 percent of the voters as against 8.0 percent of the voting age population. In 2010, the numbers the voters as against 8.0 percent of the voting age population. In 2010, the numbers were 9.6 and 7.4 percent.were 9.6 and 7.4 percent.

Schlozman, Verba, and Brady (2012) show that there is a signifi cant socioeco-Schlozman, Verba, and Brady (2012) show that there is a signifi cant socioeco- nomic skew to all forms of political participation with the exception of participating nomic skew to all forms of political participation with the exception of participating in a protest—an activity in which very few Americans participate. Voting tilts the in a protest—an activity in which very few Americans participate. Voting tilts the policy scales in favor of top incomes. Another important distortion comes from policy scales in favor of top incomes. Another important distortion comes from campaign contributions, which we discuss in the next section.campaign contributions, which we discuss in the next section.

Campaign Contributions and Political Outcomes

Campaign contributions by individuals have grown over time, with 3,138,564 Campaign contributions by individuals have grown over time, with 3,138,564 individuals making itemized contributions in 2012 compared to 224,322 in 1980. individuals making itemized contributions in 2012 compared to 224,322 in 1980. But this increased participation has also been marked by increased inequality in But this increased participation has also been marked by increased inequality in contributions. Figure  5 shows that the share of total income received by the top contributions. Figure  5 shows that the share of total income received by the top 0.01 percent of households is about 5 percent but that the share of campaign contri-0.01 percent of households is about 5 percent but that the share of campaign contri- butions made by the top 0.01  percent of the voting age population is now over butions made by the top 0.01  percent of the voting age population is now over 40 percent.40 percent.66

This change over several decades does not seem to be primarily driven by This change over several decades does not seem to be primarily driven by legal factors governing donations: broadly speaking, the legal framework for legal factors governing donations: broadly speaking, the legal framework for wealthy individuals to donate unlimited amounts was set in place decades earlier by wealthy individuals to donate unlimited amounts was set in place decades earlier by

5 There is overreporting of citizenship and turnout and probably underreporting of income. Ansolabehere and Hersh (2012) show that, in sample election surveys, turnout is heavily overreported and that the tendency to overreport is increasing in income. However, the same authors show that, for 2008, the Current Population Survey turnout rate among citizens is only 2  percent higher than the turnout of the Voting Eligible Population computed by McDonald (2011). Thus, overreport bias in the Current Population Survey appears unlikely to account for the strong differences shown in Figure 4. 6 We have used the 0.01  percent rather than the 0.1  percent or the 1  percent because in 1982 less than 0.1 percent of the voting age population made itemized contributions. Although contributing has become more widespread, it has also become more concentrated, with the top 0.01 percent dominating total contributions.

112 Journal of Economic Perspectives

Buckley v. Valeo (424 US 1 [1976]). Rather, it refl ects the rising wealth of the super-(424 US 1 [1976]). Rather, it refl ects the rising wealth of the super- rich and an increased willingness to spend large sums on elections.rich and an increased willingness to spend large sums on elections.

One stark indication of increased willingness to spend comes from a compar-One stark indication of increased willingness to spend comes from a compar- ison of the largest individual contributors in federal elections over time. In 1980, ison of the largest individual contributors in federal elections over time. In 1980, the top contributor was Cecil R. Haden, owner of the tugboat operator Bay-Houston the top contributor was Cecil R. Haden, owner of the tugboat operator Bay-Houston Towing, who gave $1.72 million (in 2012 dollars), nearly six times the amount given Towing, who gave $1.72 million (in 2012 dollars), nearly six times the amount given by the next largest contributor. In 2012, the two largest donors were Sheldon and by the next largest contributor. In 2012, the two largest donors were Sheldon and Miriam Adelson, who gave $56.8  million and $46.6  million, respectively. Other Miriam Adelson, who gave $56.8  million and $46.6  million, respectively. Other members of the Forbes  400 accompany the Adelsons; 388  current members are members of the Forbes  400 accompany the Adelsons; 388  current members are on record as having made political contributions. They account for 40 of the on record as having made political contributions. They account for 40 of the

Figure 5 Concentration of Income and Campaign Contributions in the Top 0.01 Percent of Households and Voting Age Population

Source: For income data, Piketty and Saez (2013). Notes: The dark line tracks the share of campaign contributions in all federal elections donated by the top 0.01  percent of the voting age population. The number of donors included in the 0.01  percent share of voting age population grew from 16,444 in 1980 to 24,092 in 2012. During the same period, the minimum amount given to be included in the top 0.01 percent grew in real terms from $5,616 to $25,000 (in  2012 dollars). The shaded line tracks the share of total income (including capital gains) received by the top 0.01 percent of households. The fi gure includes individual contributions to Super PACs and 527 organizations but excludes contributions to nondisclosing 501c(4) organizations, which are recorded to have spent approximately $143 million in 2010 and $318 million in 2012, much of which was raised from wealthy individuals. Were it possible to include contributions to nondisclosing 501c(4)’s, the trend line would likely be 1–2 percentage points higher in 2010 and 2012.

0%

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Adam Bonica, Nolan McCarty, Keith T. Poole, and Howard Rosenthal 113

155 individuals who contributed $1 million or more to state and federal elections 155 individuals who contributed $1 million or more to state and federal elections during the 2012 election cycle.during the 2012 election cycle.

Another wealthy group is represented by a sample of 4,493 board members and Another wealthy group is represented by a sample of 4,493 board members and chief executive offi cers from Fortune 500 fi rms. More than four in fi ve in this group chief executive offi cers from Fortune 500 fi rms. More than four in fi ve in this group reported contributions in federal elections, a proportion that looks even higher reported contributions in federal elections, a proportion that looks even higher when observing that many noncontributors are foreign nationals and are prohib-when observing that many noncontributors are foreign nationals and are prohib- ited by law from contributing to US political campaigns. Overall, the corporate ited by law from contributing to US political campaigns. Overall, the corporate sample gave over $170 million during the 2012 election cycle. These contributors sample gave over $170 million during the 2012 election cycle. These contributors have given a lifetime average over the period 1979 –2012 of $172,513 per individual have given a lifetime average over the period 1979 –2012 of $172,513 per individual and a lifetime median of $30,359. While these numbers are miniscule compared to and a lifetime median of $30,359. While these numbers are miniscule compared to philanthropic giving, the participation rate of the nation’s wealthiest individuals is philanthropic giving, the participation rate of the nation’s wealthiest individuals is quite astounding when one considers that less than 4 percent of citizens have given quite astounding when one considers that less than 4 percent of citizens have given in amounts large enough to be itemized. (Small contributions—less than $500 to a in amounts large enough to be itemized. (Small contributions—less than $500 to a candidate before 1990, and $200 since then—are not reported on Federal Election candidate before 1990, and $200 since then—are not reported on Federal Election Commission disclosure forms.)Commission disclosure forms.)

Consistent with Figure 5, there appears to be a growing reliance on the top Consistent with Figure 5, there appears to be a growing reliance on the top 0.01 percent of donors. Democrats as well as Republicans rely on big donors. The 0.01 percent of donors. Democrats as well as Republicans rely on big donors. The sources of contributions to Democrats are shown in Figure  6. The Democrats sources of contributions to Democrats are shown in Figure  6. The Democrats have come to rely, increasingly, on contributions from individuals, particularly have come to rely, increasingly, on contributions from individuals, particularly big money. Contributions from organized labor, never dominant, have fallen big money. Contributions from organized labor, never dominant, have fallen in importance.in importance.77 The relative proportions of funds raised by Democrats from The relative proportions of funds raised by Democrats from the top 0.01  percent and from organized labor provide a telling comparison. the top 0.01  percent and from organized labor provide a telling comparison. The top 0.01  percent, whose donations had been roughly on par with those of The top 0.01  percent, whose donations had been roughly on par with those of labor during 1980s and early 1990s, outspent labor by more than a 4:1  margin labor during 1980s and early 1990s, outspent labor by more than a 4:1  margin during the 2012 election cycle. While Republicans had a slight advantage in during the 2012 election cycle. While Republicans had a slight advantage in fundraising from the top 0.01 percent during the 1980s, this trend had reversed fundraising from the top 0.01 percent during the 1980s, this trend had reversed by the mid-1990s, with Democrats raising more than Republicans from the top by the mid-1990s, with Democrats raising more than Republicans from the top 0.01 percent in six out of eight election cycles between 1994 and 2008. Only in 0.01 percent in six out of eight election cycles between 1994 and 2008. Only in the last two election cycles did Republicans regain the advantage in fundraising the last two election cycles did Republicans regain the advantage in fundraising from the top 0.01 percent.from the top 0.01 percent.88 While it is diffi cult to gauge the effect of the Demo- While it is diffi cult to gauge the effect of the Demo- crat’s reliance on contributions from the wealthy, it does likely preclude a strong crat’s reliance on contributions from the wealthy, it does likely preclude a strong focus on redistributive policies.focus on redistributive policies.

For individual campaign donors, we have explored who gives how much to For individual campaign donors, we have explored who gives how much to whom in terms of the ideology of the donors and candidates. We measure the whom in terms of the ideology of the donors and candidates. We measure the ideology of donors and candidates jointly in an estimation procedure (for details, ideology of donors and candidates jointly in an estimation procedure (for details, see Bonica 2013a, 2013b) reasonably analogous to DW-NOMINATE estimation (see see Bonica 2013a, 2013b) reasonably analogous to DW-NOMINATE estimation (see Figures  1– 3) for roll call data. Campaign fi nance scores reported here are based Figures  1– 3) for roll call data. Campaign fi nance scores reported here are based on individual contributions in federal races. Similar results for candidates are also on individual contributions in federal races. Similar results for candidates are also obtained by using PAC (“political action committee”) contributions with controls obtained by using PAC (“political action committee”) contributions with controls

7 For a contrary view on the importance of the decline of contributions from labor, see Hacker and Pierson (2010). 8 In 2012, 62  percent of contribution dollars raised from the top 0.01 percent went to Republicans, accounting for 40 percent of the party’s total campaign dollars.

114 Journal of Economic Perspectives

for standard covariates such as incumbency and seniority. Figure 7 shows how the for standard covariates such as incumbency and seniority. Figure 7 shows how the top 0.01 percent of donors and smaller donors distribute their donations in terms top 0.01 percent of donors and smaller donors distribute their donations in terms of the ideology of candidates (including losing candidates). To further explore of the ideology of candidates (including losing candidates). To further explore the ideological leanings of the wealthiest members of the business community, we the ideological leanings of the wealthiest members of the business community, we include a third density of donations from a group composed of the Forbes 400 list include a third density of donations from a group composed of the Forbes 400 list of wealthiest Americans and of directors and executives of Fortune 500 companies. of wealthiest Americans and of directors and executives of Fortune 500 companies. In addition to the ideological distribution of dollars allocated by each group of In addition to the ideological distribution of dollars allocated by each group of donors, the fi gure displays the estimated ideal points for several well-known politi-donors, the fi gure displays the estimated ideal points for several well-known politi- cians and the 30 richest Americans that have made contributions. The vertical lines cians and the 30 richest Americans that have made contributions. The vertical lines

Figure 6 Democratic Fundraising Sources

Sources: The Federal Election Commission and the Internal Revenue Service. Notes: Includes funds raised by federal candidates, national party committees, Super PACs, federal-oriented 527s, and other independent groups aligned with the Democratic Party (for example, Priorities USA Action and the MoveOn.org 527). The amounts from labor and other PACs include direct contributions to candidates and committees, soft-money contributions to national party committees (prior to 2004), and independent expenditures (including those made through 527s) to support Democrats or oppose Republicans in the general elections. The total amounts raised from individuals are divided into three  categories. The fi rst category includes all donations made by individuals included in the top 0.01  percent of donors in the voting age population, similar to Figure  5. The category labeled “Large Donors” includes all individual donors that gave more than $1,500 (in 2012 dollars) during the election cycle but not enough to be included in the top 0.01 percent. The category labeled “Small Donors” includes contributions from donors giving less than $1,500 during the election cycle plus the total funds raised in nonitemized amounts. The cutoff at $1,500 approximates the infl ation-adjusted $500 minimum donation required for disclosure in 1980.

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Why Hasn’t Democracy Slowed Rising Inequality? 115

in the fi gure show the mean positions of Democratic and Republican members of in the fi gure show the mean positions of Democratic and Republican members of Congress during the period.Congress during the period.

Although contributions from the Forbes 400/Fortune 500 skew somewhat to Although contributions from the Forbes 400/Fortune 500 skew somewhat to the right, a sizable percentage of their contribution dollars go to support candi-the right, a sizable percentage of their contribution dollars go to support candi- dates who are left of center. In coding their positions, there are three channels for dates who are left of center. In coding their positions, there are three channels for placing these wealthy individuals in the moderate category. First, the individual placing these wealthy individuals in the moderate category. First, the individual might donate nearly exclusively to moderates of one of the two  major parties. might donate nearly exclusively to moderates of one of the two  major parties. Second, the individual might spread contributions across moderates in both Second, the individual might spread contributions across moderates in both parties. Third, the contributions could be dispersed across the ideological spec-parties. Third, the contributions could be dispersed across the ideological spec- trum. The third channel is unimportant empirically. As a rule, individual donors trum. The third channel is unimportant empirically. As a rule, individual donors

Figure 7 The Ideological Distribution of Dollars from Small Donors and the Top 0.01 Percent

Source: Authors calculation’s using “CF” scores, as described in Bonica (2013b), as measures of candidate and contributor ideology. Data on political contributions are from the Federal Election Commission. Notes: While the DW-NOMINATE scores range from –1 to 1, the Bonica CF scores range from –2 to 2. The kernel densities show the distribution of candidate ideal points weighted by the total amounts raised from small donors (defi ned as donors giving $500 or less during a two-year election cycle), from the top 0.01 percent of donors, and a group of the very wealthy donors composed of members of the Forbes 400 and directors and CEOs of Fortune 500 fi rms. The densities are based on contributions made to candidates for federal offi ce from 2004 to 2012. The names above the density plots mark the estimated ideal points of the 30 richest Americans that have made contributions. In order to aid in interpreting the scale, the ideal points for several well-known politicians are included below the densities (read along the x-axis only; the varying heights of these points do not mean anything). The vertical bars show the average positions of Democratic and Republican candidates.

RD

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n ey

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gh te

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ty

Ron Paul Michelle Bachmann

Paul Ryan Mitt Romney

Chris Christie Olympia Snowe

Joe Manchin Max Baucus

Andrew Cuomo Bill Clinton

Hillary Clinton Barack Obama

Bernie Sanders Alan Grayson

George Soros

Bill Gates

Jeff Bezos

Jacqueline Mars

Forrest Mars

S. Robson Walton

David Koch

Donald Bren

Sheldon Adelson

John Paulson

Larry Ellison

Paul Allen

Warren Buffet

Sergey Brin

Larry Page

Anne Cox

Chambers

James Simons

Ronald Perelman

George Kaiser

Carl Icahn

Abigail Johnson

John Mars

Jim Walton

Charles Koch

Michael Dell

Alice Walton

Christy Walton

Phil Knight

Steve Ballmer

116 Journal of Economic Perspectives

exhibit high levels of partisanship in their giving patterns, and the super-rich are exhibit high levels of partisanship in their giving patterns, and the super-rich are no exception. The vast majority have given at least 90 percent of their contribution no exception. The vast majority have given at least 90 percent of their contribution dollars to one or the other party. Of those who split their contributions between dollars to one or the other party. Of those who split their contributions between parties, most give predominantly to the moderate wings of both parties. As such, parties, most give predominantly to the moderate wings of both parties. As such, the bimodal density of contribution dollars refl ects the ideological diversity in the the bimodal density of contribution dollars refl ects the ideological diversity in the contributors, rather than individuals purchasing access or otherwise acting stra-contributors, rather than individuals purchasing access or otherwise acting stra- tegically in ways that cause them to disperse their contributions widely. The level tegically in ways that cause them to disperse their contributions widely. The level of ideological diversity is apparent in the estimated ideal points of the 30 richest 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 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 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 the Democrats. Similarly, only one of the 30, Charles Koch, is to the right of the mean Republican member of Congress. Nonetheless, the densities in Figure 7 are mean Republican member of Congress. Nonetheless, the densities in Figure 7 are bimodal, with the big contributions appearing as moderate only in the limited bimodal, with the big contributions appearing as moderate only in the limited sense that they are less polarized than the small contributions.sense that they are less polarized than the small contributions.

The ideological diversity of corporate elites is not simply a function of fi rm-The ideological diversity of corporate elites is not simply a function of fi rm- specifi c incentives that would cause a fi rm to stake out an ideological position. specifi c incentives that would cause a fi rm to stake out an ideological position. Bipartisan boardrooms are the norm. One way a fi rm maintains political access is Bipartisan boardrooms are the norm. One way a fi rm maintains political access is to have both high-profi le Democratic donors and high-profi le Republican donors to have both high-profi le Democratic donors and high-profi le Republican donors within the fi rm. A consequence of the ideological diversity of the corporate commu-within the fi rm. A consequence of the ideological diversity of the corporate commu- nity is to help keep the political fi nancing system competitive for both parties, while nity is to help keep the political fi nancing system competitive for both parties, while at the same time ensuring that fi rms remain well connected in both parties. Among at the same time ensuring that fi rms remain well connected in both parties. Among the directors of JPMorgan Chase, to cite a typical example, are Crandall Bowles, the directors of JPMorgan Chase, to cite a typical example, are Crandall Bowles, former chair and chief executive offi cer of Springs Global and wife of Erskine former chair and chief executive offi cer of Springs Global and wife of Erskine Bowles, and James Bell, a former Boeing Co. executive. Crandall Bowles and James Bowles, and James Bell, a former Boeing Co. executive. Crandall Bowles and James Bell have ideal points as far left as Bill and Hillary Clinton. The board also contains Bell have ideal points as far left as Bill and Hillary Clinton. The board also contains former ExxonMobil chief executive offi cer Lee Raymond and former Johnson & former ExxonMobil chief executive offi cer Lee Raymond and former Johnson & Johnson chief executive offi cer William Weldon whose positions are as far right as Johnson chief executive offi cer William Weldon whose positions are as far right as Paul Ryan. JPMorgan Chase chief executive offi cer Jamie Dimon is moderate left.Paul Ryan. JPMorgan Chase chief executive offi cer Jamie Dimon is moderate left.

We have seen that the 30 richest Americans are diverse but relatively moderate. We have seen that the 30 richest Americans are diverse but relatively moderate. This observation is echoed in comparing the ideological densities of contribution This observation is echoed in comparing the ideological densities of contribution dollars from Forbes 400/Fortune 500 individuals and small donors. While the contri-dollars from Forbes 400/Fortune 500 individuals and small donors. While the contri- butions from the Forbes 400/Fortune 500 go disproportionately to candidates who butions from the Forbes 400/Fortune 500 go disproportionately to candidates who are interior to the party means, contributions from small donors go disproportion-are interior to the party means, contributions from small donors go disproportion- ately to candidates on the ideological extremes. The distribution of contributions ately to candidates on the ideological extremes. The distribution of contributions from the top 0.01 percent of the voting age population is more extreme than the from the top 0.01 percent of the voting age population is more extreme than the Forbes 400/Fortune 500 but less extreme than the small donors.Forbes 400/Fortune 500 but less extreme than the small donors.

While Forbes  400/Fortune  500 individuals are more moderate than small While Forbes  400/Fortune  500 individuals are more moderate than small donors, their contributions tilt toward Republicans. The top 0.01 percent of donors donors, their contributions tilt toward Republicans. The top 0.01 percent of donors give pretty evenly to Democrats and Republicans. Why are big donors a bit less give pretty evenly to Democrats and Republicans. Why are big donors a bit less polarized than other donors? With regard to the left, the answer seems straightfor-polarized than other donors? With regard to the left, the answer seems straightfor- ward: those who are left and rich still have a limited tolerance for redistribution. ward: those who are left and rich still have a limited tolerance for redistribution. For the right, the answer seems a bit more complicated. The wealthy are often more For the right, the answer seems a bit more complicated. The wealthy are often more pro-business than pro-market (a distinction explored by Zingales 2012), and are pro-business than pro-market (a distinction explored by Zingales 2012), and are often not anti-statist.often not anti-statist.

Adam Bonica, Nolan McCarty, Keith T. Poole, and Howard Rosenthal 117

This section has emphasized political spending in the form of campaign This section has emphasized political spending in the form of campaign contributions. We should also note that even more is spent on lobbying. While a contributions. We should also note that even more is spent on lobbying. While a good deal of lobbying refl ects corporate competition—for example, will Citicorp or good deal of lobbying refl ects corporate competition—for example, will Citicorp or Wells Fargo be allowed to purchase Wachovia—much of it gets directed in ways that Wells Fargo be allowed to purchase Wachovia—much of it gets directed in ways that increase inequality. One example is the persistence of the carried interest provision increase inequality. One example is the persistence of the carried interest provision for hedge funds, often championed by liberal Democrat Senator Charles Schumer for hedge funds, often championed by liberal Democrat Senator Charles Schumer of New York. Another is the subprime mortgage origination industry, which was of New York. Another is the subprime mortgage origination industry, which was defended by lobbyists and does not seem to have helped the poor. Black homeown-defended by lobbyists and does not seem to have helped the poor. Black homeown- ership rates in 2012 have fallen back to their level in the mid-1990s (McCarty, Poole, ership rates in 2012 have fallen back to their level in the mid-1990s (McCarty, Poole, and Rosenthal 2013). Originators do seem to have benefi ted. Igan, Mishra, and and Rosenthal 2013). Originators do seem to have benefi ted. Igan, Mishra, and Tressel (2009) have shown that the bulk of the lobbying on subprime was carried Tressel (2009) have shown that the bulk of the lobbying on subprime was carried out by fi nancial institutions that offered the riskiest products and that turned out to out by fi nancial institutions that offered the riskiest products and that turned out to be most likely to fail.be most likely to fail.

We would also be amiss not to emphasize the role of the revolving door between We would also be amiss not to emphasize the role of the revolving door between politics and the private sector as another nontrivial form of political expenditure. politics and the private sector as another nontrivial form of political expenditure. For example, Robert Rubin, Treasury Secretary under Clinton, went to Citicorp For example, Robert Rubin, Treasury Secretary under Clinton, went to Citicorp from the US Treasury. The recently confi rmed Obama Treasury Secretary, Jack Lew, from the US Treasury. The recently confi rmed Obama Treasury Secretary, Jack Lew, after serving during the Clinton administration and doing a highly compensated after serving during the Clinton administration and doing a highly compensated stint at New York University, was chief operating offi cer of Citicorp from 2006 to stint at New York University, was chief operating offi cer of Citicorp from 2006 to 2008. One view is that these people are dedicated public servants who sacrifi ce 2008. One view is that these people are dedicated public servants who sacrifi ce fi nancial gain to serve the American public. The other is that the revolving door, fi nancial gain to serve the American public. The other is that the revolving door, even with the best of intentions, clouds their decision making. Revolving door jobs, even with the best of intentions, clouds their decision making. Revolving door jobs, lobbying, and campaign contributions by the rich, when coupled with free market lobbying, and campaign contributions by the rich, when coupled with free market ideological proclivities in the voting population, are likely to have abetted the ideological proclivities in the voting population, are likely to have abetted the increase in inequality.increase in inequality.

We might wonder what these individuals receive for their contributions? A We might wonder what these individuals receive for their contributions? A decade ago, Ansolabehere, de Figueiredo, and Snyder (2003) asked in this journal, decade ago, Ansolabehere, de Figueiredo, and Snyder (2003) asked in this journal, “Why is There So Little Money in U.S. Politics?” They concluded that money was “Why is There So Little Money in U.S. Politics?” They concluded that money was largely directed at ideological consumption rather than buying political benefi ts; largely directed at ideological consumption rather than buying political benefi ts; for an opposite view, see Gordon, Hafer, and Landa (2007). The question we for an opposite view, see Gordon, Hafer, and Landa (2007). The question we focus on is a little different: Why have total contributions and the share of total focus on is a little different: Why have total contributions and the share of total contributions from the top .01 percent risen so much in the last few decades? One contributions from the top .01 percent risen so much in the last few decades? One possibility is that campaign contributions are just another fad for the rich in the possibility is that campaign contributions are just another fad for the rich in the twenty-fi rst  century. Standard economic arguments are that rational people won’t twenty-fi rst  century. Standard economic arguments are that rational people won’t make large contributions in the hope of different policy outcomes for the same make large contributions in the hope of different policy outcomes for the same reason that rational people will not expect their personal vote to infl uence the reason that rational people will not expect their personal vote to infl uence the outcome of elections.outcome of elections.99 However, when contributions become very large, then However, when contributions become very large, then the notion that your contributions will be completely overshadowed by others may the notion that your contributions will be completely overshadowed by others may

9 There is, moreover, an ongoing academic debate about the effect of campaign spending on electoral outcomes. For the no-effect position, see Levitt (1994). For an opposing view, see Erikson and Palfrey (2000). We simply ask the reader to do the thought experiment as to what American politics would look like if one party were permitted no expenditure on polling, data analysis, grass roots organization, and television advertising.

118 Journal of Economic Perspectives

not be as true. Large contributors may also be serving as “bundlers” (fundraisers not be as true. Large contributors may also be serving as “bundlers” (fundraisers who solicit checks from other individuals and then pass the checks along to candi-who solicit checks from other individuals and then pass the checks along to candi- dates and committees), similar to the collective funding of industry lobbies such as dates and committees), similar to the collective funding of industry lobbies such as the American Bankers Associationthe American Bankers Association. Contributions may help carry the day on very Contributions may help carry the day on very specifi c issues that relate to income inequality—like the provisions that allow the specifi c issues that relate to income inequality—like the provisions that allow the “carried interest” income received by private equity investors to be taxed at a lower “carried interest” income received by private equity investors to be taxed at a lower capital gains tax rate rather than the higher marginal income tax rate.capital gains tax rate rather than the higher marginal income tax rate.

More broadly, there does seem to be evidence that members of Congress More broadly, there does seem to be evidence that members of Congress represent the views of their high-income constituents much more than those of represent the views of their high-income constituents much more than those of low-income ones (for example, Bartels 2008).low-income ones (for example, Bartels 2008).1010 Gilens (2012) presents considerable Gilens (2012) presents considerable evidence showing that the policy outputs of the US national government are far evidence showing that the policy outputs of the US national government are far more responsive to preferences of high-income voters, especially in policy domains more responsive to preferences of high-income voters, especially in policy domains where the opinions of rich and poor diverge. When the rich and poor (90th and where the opinions of rich and poor diverge. When the rich and poor (90th and 10th  percentile incomes) disagree more than 10  percentage points on a policy 10th  percentile incomes) disagree more than 10  percentage points on a policy question, the odds of a policy change are completely unresponsive to views of the question, the odds of a policy change are completely unresponsive to views of the poorer voters. But if 80 percent of high-income voters support the change, it has a poorer voters. But 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 50 percent chance of passing compared to only a 32 percent chance of passing with 80 percent support from the poor.80 percent support from the poor.1111

Political Institutions and Reactions to Inequality

The United States is more majoritarian (winner takes all) in its political institu-The United States is more majoritarian (winner takes all) in its political institu- tions than many nations, but also has a higher degree of inequality, which suggests tions than many nations, but also has a higher degree of inequality, which suggests the possibility that less-majoritarian systems may in fact have less inequality. Empiri-the possibility that less-majoritarian systems may in fact have less inequality. Empiri- cally, the use of proportional representation—in which at least some members of cally, the use of proportional representation—in which at least some members of the legislature are chosen in proportion to the vote of an area, not in elections the legislature are chosen in proportion to the vote of an area, not in elections in single-person districts—correlates with lower levels of economic inequality. in single-person districts—correlates with lower levels of economic inequality. Austen-Smith (2000) and Iversen and Soskice (2006) match this stylized fact in Austen-Smith (2000) and Iversen and Soskice (2006) match this stylized fact in theoretical models. Although the proposed mechanism varies, the central insight theoretical models. Although the proposed mechanism varies, the central insight is that plurality rule (where the candidate with the most votes wins) is conducive is that plurality rule (where the candidate with the most votes wins) is conducive to two-party political systems (Duverger 1954). In turn, political bargaining in two-to two-party political systems (Duverger 1954). In turn, political bargaining in two- party systems tends to privilege coalitions of the middle and upper classes against party systems tends to privilege coalitions of the middle and upper classes against the poorthe poor. A related institutional distinction compares parliamentary regimes, which A related institutional distinction compares parliamentary regimes, which lack a strong separation of powers between the legislative and executive branch lack a strong separation of powers between the legislative and executive branch

10 The Bartels (2008) claim is based on correlating DW-NOMINATE scores with public opinion data. The claim, however, has been criticized on methodological grounds by Bhatti and Erikson (2011). Using much larger sample sizes, Tausanovitch (2011) confi rms the Bartels claim but then argues that the poor are nonetheless represented. His argument is that even if the DW-NOMINATE scores correlate more highly with the expressed preferences of those with high incomes, the scores also respond to the propor- tion of poor constituents. Resolving the representation controversy is undoubtedly complicated by the fact, documented above, that the rich are a very heterogeneous group. 11 He does fi nd however that the gap in responsiveness of the preferences of the rich and poor is largest on noneconomic issues such as abortion and homosexuality, areas in which high-income voters tend to take the liberal positions.

Why Hasn’t Democracy Slowed Rising Inequality? 119

(because the executive is selected by the party with a majority in the legislative (because the executive is selected by the party with a majority in the legislative branch), to presidential-congressional ones, with separation of powers. Here the branch), to presidential-congressional ones, with separation of powers. Here the theoretical analysis of Persson, Roland, and Tabellini (2000) points to less redistri-theoretical analysis of Persson, Roland, and Tabellini (2000) points to less redistri- bution in presidential-congressional regimes like the United States.bution in presidential-congressional regimes like the United States.

It is an open question as to the robustness of the conclusions of various theo-It is an open question as to the robustness of the conclusions of various theo- retical models of the politics of inequality. In at least some cases, the theoretical retical models of the politics of inequality. In at least some cases, the theoretical predictions are not robust to changes in assumptions. For example, Olszewski and predictions are not robust to changes in assumptions. For example, Olszewski and Rosenthal (2004) show that political coalitions and after-tax outcomes can shift Rosenthal (2004) show that political coalitions and after-tax outcomes can shift dramatically in certain models when a quasi-linear utility function is replaced by a dramatically in certain models when a quasi-linear utility function is replaced by a Cobb–Douglas utility function.Cobb–Douglas utility function.

In the past, most political economy models that depart from majoritarian In the past, most political economy models that depart from majoritarian settings imposed some form of compromise bargaining in the political process (for settings imposed some form of compromise bargaining in the political process (for some different approaches, see Baron and Ferejohn 1989; Alesina and Rosenthal some different approaches, see Baron and Ferejohn 1989; Alesina and Rosenthal 1995; Grossman and Helpman 1999). However, as compromise has been expunged 1995; Grossman and Helpman 1999). However, as compromise has been expunged from the Washington political dictionary, political science models of policy forma-from the Washington political dictionary, political science models of policy forma- tion have largely turned to tion have largely turned to pivot models following the seminal work of Krehbiel models following the seminal work of Krehbiel (1998). Pivot models embed the institutional structure of the political system of (1998). Pivot models embed the institutional structure of the political system of the federal government. In order to change policy from the status quo, legislation the federal government. In order to change policy from the status quo, legislation must pass over hurdles that include passage by simple majority in both Houses of must pass over hurdles that include passage by simple majority in both Houses of Congress, the 60 votes needed to shut down possible fi libusters in the Senate, and Congress, the 60 votes needed to shut down possible fi libusters in the Senate, and the two-thirds majorities in both houses needed to override vetoes by the president, the two-thirds majorities in both houses needed to override vetoes by the president, followed by challenges in the courts and possible foot-dragging or noncompli-followed by challenges in the courts and possible foot-dragging or noncompli- ance in the states. Models of these institutional processes identify the actors whose ance in the states. Models of these institutional processes identify the actors whose support is necessary for policy change. These actors are known as support is necessary for policy change. These actors are known as pivots. Potential . Potential pivots include the median representative in the House (or perhaps, the median pivots include the median representative in the House (or perhaps, the median member of the majority party), the fi libuster pivot in the Senate, and veto over-member of the majority party), the fi libuster pivot in the Senate, and veto over- ride pivots in both houses. At a given time, which of the potential pivots will be ride pivots in both houses. At a given time, which of the potential pivots will be the pivotal legislator depends on the distribution of liberal–conservative prefer-the pivotal legislator depends on the distribution of liberal–conservative prefer- ences in the two chambers. The internal rules of the two Houses of Congress also ences in the two chambers. The internal rules of the two Houses of Congress also constitute hurdles.constitute hurdles.

Of course, the membership of the US Congress is not simply determined by Of course, the membership of the US Congress is not simply determined by popular majorities, which leads to additional hurdles. Article V of the US Constitu-popular majorities, which leads to additional hurdles. Article V of the US Constitu- tion has one unamendable provision that gives each state two votes in the Senate, tion has one unamendable provision that gives each state two votes in the Senate, without regard to population. The provision creates a situation in which some sena-without regard to population. The provision creates a situation in which some sena- tors represent far fewer people than others. A pivot hurdle on the Affordable Care tors represent far fewer people than others. A pivot hurdle on the Affordable Care Act was Ben Nelson, the Democratic senator furthest to the right. Nelson is from Act was Ben Nelson, the Democratic senator furthest to the right. Nelson is from Nebraska, which has its two of the 100 senators but only three of the 435 representa-Nebraska, which has its two of the 100 senators but only three of the 435 representa- tives. Majority representation in the House is distorted by geographic sorting of the tives. Majority representation in the House is distorted by geographic sorting of the population and, to a lesser extent, by gerrymandering that favors the Republicans. population and, to a lesser extent, by gerrymandering that favors the Republicans. Gerrymandering explanations are rampant in the media but they should not be Gerrymandering explanations are rampant in the media but they should not be exaggerated. Democrats lost the House in 2010, but they won it with the same appor-exaggerated. Democrats lost the House in 2010, but they won it with the same appor- tionment in 2006 and 2008. While gerrymandering has a Republican bias, it does not tionment in 2006 and 2008. While gerrymandering has a Republican bias, it does not seem to contribute to polarization. Both geographic sorting and gerrymandering are seem to contribute to polarization. Both geographic sorting and gerrymandering are discussed in more detail in McCarty, Poole, and Rosenthal (2009).discussed in more detail in McCarty, Poole, and Rosenthal (2009).

120 Journal of Economic Perspectives

Multiple pivots imply that status quo policies may become gridlocked. The Multiple pivots imply that status quo policies may become gridlocked. The range of gridlocked policies expands theoretically, and has also expanded empiri-range of gridlocked policies expands theoretically, and has also expanded empiri- cally, as polarization of legislative preferences increases. Expanded polarization cally, as polarization of legislative preferences increases. Expanded polarization has resulted in diminished legislative output (McCarty, Poole, and Rosenthal 2006, has resulted in diminished legislative output (McCarty, Poole, and Rosenthal 2006, pp. 177–183).pp. 177–183).

Even if gridlock is sometimes overcome, policy change will need to be moder-Even if gridlock is sometimes overcome, policy change will need to be moder- ated to attract the support of critical pivots. In the fi rst two years of the Obama ated to attract the support of critical pivots. In the fi rst two years of the Obama presidency, for example, the stimulus package, the Patient Protection and Afford-presidency, for example, the stimulus package, the Patient Protection and Afford- able Care Act, and the Dodd–Frank Act all passed. However, each piece of legislation able Care Act, and the Dodd–Frank Act all passed. However, each piece of legislation was sharply limited by the need to obtain 60 votes to avoid a Senate fi libuster. All was sharply limited by the need to obtain 60 votes to avoid a Senate fi libuster. All three initially passed the Senate with exactly 60  votes. To obtain passage of the three initially passed the Senate with exactly 60  votes. To obtain passage of the stimulus bill, the administration needed to cut $200 billion of assistance to state and stimulus bill, the administration needed to cut $200 billion of assistance to state and local governments. Among the many concessions made in Dodd–Frank, a tax on local governments. Among the many concessions made in Dodd–Frank, a tax on banking transactions was removed to obtain the pivotal vote of Republican Senator banking transactions was removed to obtain the pivotal vote of Republican Senator Scott Brown of Massachusetts (McCarty, Poole, Romer and Rosenthal 2010). The Scott Brown of Massachusetts (McCarty, Poole, Romer and Rosenthal 2010). The Patient Protection and Affordable Care Act did raise certain taxes on those with Patient Protection and Affordable Care Act did raise certain taxes on those with high incomes, but in many ways it was constructed to appease insurance and phar-high incomes, but in many ways it was constructed to appease insurance and phar- maceutical companies. Taxes were also increased on high incomes in the “fi scal maceutical companies. Taxes were also increased on high incomes in the “fi scal cliff” legislation of 2012, but rates remain well below the levels in effect before cliff” legislation of 2012, but rates remain well below the levels in effect before the Reagan presidency. Moreover, this legislation ended payroll tax cuts that had the Reagan presidency. Moreover, this legislation ended payroll tax cuts that had provided low-income tax relief during the Great Recession. In the 2010 midterm provided low-income tax relief during the Great Recession. In the 2010 midterm elections, the Republicans regained control of the House of Representatives. The elections, the Republicans regained control of the House of Representatives. The pivot was thus shifted from the relatively moderate 60th (from the left) position pivot was thus shifted from the relatively moderate 60th (from the left) position in the Senate to the quite conservative House median. The 2012 tax legislation in the Senate to the quite conservative House median. The 2012 tax legislation refl ected this shift.refl ected this shift.

Legislative gridlock also allows policies to drift. In principle, this effect could Legislative gridlock also allows policies to drift. In principle, this effect could increase or decrease inequality. For example, an unindexed minimum wage falls in increase or decrease inequality. For example, an unindexed minimum wage falls in real terms if not updated by law. In contrast, unindexed income tax rates lead to real terms if not updated by law. In contrast, unindexed income tax rates lead to “bracket creep” and higher taxes as infl ation gradually pushes incomes into higher “bracket creep” and higher taxes as infl ation gradually pushes incomes into higher tax brackets. But in practice, indexing seems to have been applied more often tax brackets. But in practice, indexing seems to have been applied more often where it prevents the rich from suffering the effects of a drifting policy: income tax where it prevents the rich from suffering the effects of a drifting policy: income tax brackets are indexed for infl ation, but minimum wages are not.brackets are indexed for infl ation, but minimum wages are not.

Gridlock may also produce bureaucratic drift: those who are regulated can turn Gridlock may also produce bureaucratic drift: those who are regulated can turn to a variety of different regulators at the federal level, as well as in the states and to a variety of different regulators at the federal level, as well as in the states and the courts, and when the legislature is gridlocked, these regulators become freer to the courts, and when the legislature is gridlocked, these regulators become freer to pursue their own policy objectives without fear of legislative override (Ferejohn and pursue their own policy objectives without fear of legislative override (Ferejohn and Shipan 1990). This dynamic was very important in fi nancial deregulation (McCarty, Shipan 1990). This dynamic was very important in fi nancial deregulation (McCarty, Poole, and Rosenthal 2013). For example, the barriers between commercial banking, Poole, and Rosenthal 2013). For example, the barriers between commercial banking, investment banking, and insurance enshrined in Glass – Steagall were whittled to investment banking, and insurance enshrined in Glass – Steagall were whittled to nearly nothing by regulators and court decisions well before Congress offi cially nearly nothing by regulators and court decisions well before Congress offi cially repealed the law. Regulatory confl ict between the Federal Reserve, the Offi ce of the repealed the law. Regulatory confl ict between the Federal Reserve, the Offi ce of the Comptroller of the Currency, and the FDIC also facilitated lobbying as a gridlocked Comptroller of the Currency, and the FDIC also facilitated lobbying as a gridlocked Congress fi rst took two years from the fi nancial crisis to enact Dodd–Frank and Congress fi rst took two years from the fi nancial crisis to enact Dodd–Frank and then produced a bill with substantial regulatory discretion (Bair 2012). Financial then produced a bill with substantial regulatory discretion (Bair 2012). Financial

Adam Bonica, Nolan McCarty, Keith T. Poole, and Howard Rosenthal 121

industry lobbyists have to date been very successful in modifying and delaying new industry lobbyists have to date been very successful in modifying and delaying new rules, many of which are still being written. But legislative polarization makes it rules, many of which are still being written. But legislative polarization makes it exceedingly unlikely that Congress will be able to revisit Dodd–Frank and correct its exceedingly unlikely that Congress will be able to revisit Dodd–Frank and correct its shortcomings or overturn regulatory decisions. shortcomings or overturn regulatory decisions.

Conclusion: Politics and Reacting to Inequality

Economists may be inclined to downplay the role of politics and public policy Economists may be inclined to downplay the role of politics and public policy in generating and perpetuating inequality. Of course, economic shifts like global-in generating and perpetuating inequality. Of course, economic shifts like global- ization, technological shifts like information and communications technology, and ization, technological shifts like information and communications technology, and social changes like the greater propensity of high-income earners to marry each social changes like the greater propensity of high-income earners to marry each other can lead to increases in inequality. But these changes are not orthogonal to other can lead to increases in inequality. But these changes are not orthogonal to political decisions that are taken — or decisions not taken.political decisions that are taken — or decisions not taken.

For example, Piketty and Saez (2003) suggest that sharp changes in income For example, Piketty and Saez (2003) suggest that sharp changes in income inequality have been driven by destruction of assets in economic depressions and inequality have been driven by destruction of assets in economic depressions and wars and by changes in fi scal policy. The economic policies that abet and respond wars and by changes in fi scal policy. The economic policies that abet and respond to depressions are the subject of political processes, while “war is the continuation to depressions are the subject of political processes, while “war is the continuation of politics by other means” (von Clausewitz 1832 [2009]). Open immigration poli-of politics by other means” (von Clausewitz 1832 [2009]). Open immigration poli- cies, as argued by some economists like Borjas (1999), may increase inequality. The cies, as argued by some economists like Borjas (1999), may increase inequality. The infl uence of globalization refl ects political decisions about the free movement of infl uence of globalization refl ects political decisions about the free movement of goods and services. Globalization of fi nancial services allows the wealthy to benefi t goods and services. Globalization of fi nancial services allows the wealthy to benefi t from tax avoidance strategies by moving funds abroad or not bringing them home, from tax avoidance strategies by moving funds abroad or not bringing them home, depending on the policies embedded in the US tax code and the enforcement vigor depending on the policies embedded in the US tax code and the enforcement vigor of the IRS. The pace of technological development is intertwined with public policies of the IRS. The pace of technological development is intertwined with public policies related to innovation and intellectual property, and the applications of technology related to innovation and intellectual property, and the applications of technology are intertwined with how, often slower-moving, regulatory agencies struggle to keep are intertwined with how, often slower-moving, regulatory agencies struggle to keep pace. The complexity in derivatives that emerged, with its disastrous consequences for pace. The complexity in derivatives that emerged, with its disastrous consequences for the global economy, required both explicit acquiescence by the government in the the global economy, required both explicit acquiescence by the government in the form of legislation such as the Commodity Futures Modernization Act of 2000 and form of legislation such as the Commodity Futures Modernization Act of 2000 and implicit acquiescence in the failure to exercise supervision. The deregulation implicit acquiescence in the failure to exercise supervision. The deregulation and lack-of-regulation of the fi nancial sector in the 1990s and early 2000s helped to and lack-of-regulation of the fi nancial sector in the 1990s and early 2000s helped to shape the practices and compensation in that industry.shape the practices and compensation in that industry.

Thus, our general argument is that politics and public policy need to be consid-Thus, our general argument is that politics and public policy need to be consid- ered explicitly in any discussion of the causes and consequence of inequality. The ered explicitly in any discussion of the causes and consequence of inequality. The feedback from politics can also arise as a result of laws that were frozen in place, feedback from politics can also arise as a result of laws that were frozen in place, or that were never enacted. Top marginal tax rates in the United States declined or that were never enacted. Top marginal tax rates in the United States declined sharply from the 1960s through the 1980s, but since then have fl uctuated only mildly. sharply from the 1960s through the 1980s, but since then have fl uctuated only mildly. US spending programs are increasingly focused on the elderly rather than on broader US spending programs are increasingly focused on the elderly rather than on broader assistance to those of working age or those with low incomes. Overall, the kinds of assistance to those of working age or those with low incomes. Overall, the kinds of government policies that could have ameliorated the sharp rise in inequality have government policies that could have ameliorated the sharp rise in inequality have been immobilized by a combination of greater polarization, lack of voter participa-been immobilized by a combination of greater polarization, lack of voter participa- tion, feedback from high-income campaign contributors, and political institutions tion, feedback from high-income campaign contributors, and political institutions that must overcome a series of key pivots before making signifi cant changes.that must overcome a series of key pivots before making signifi cant changes.

122 Journal of Economic Perspectives

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