The “Hood Robin” Economy
No one can agree on the causes of inequality, but its effects are indisputable: more policies that benefit the already rich.
In 1973, if you put the 1 percent of the country that had made the most money in a room and got them to empty out their pockets, you’d see 8 percent of all the money paid out in wages over the last year falling to the floor. If you’d repeated that exercise in 2008, you’d find 18 percent of the economy’s income on the ground. You’d better have a pretty big room.
But that’s what makes the rich different from you and me: their riches. The problem is that since 1973 median wages have been stagnating. Inequality isn’t just rising because the rich are getting richer. It’s rising because the rest of us, by and large, aren’t. If median household incomes had risen between 1974 and 2008 by as much as they rose between 1949 and 1973, the median family would be making well over $100,000 a year by now. In such a world, we might wonder about inequality, but we’d have less reason to worry about it.
But the rest are not getting richer. The question is whether the two phenomena are connected: Has the economy gone Hood Robin, with median wages stagnating because the folks at the tippy-top are channeling more and more of the economy’s gains into their own bank accounts? Or have the rich and famous moved into their own economy, and whatever is going on with median incomes is a different problem that will require different solutions?
Economists have not had an easy time parsing this out. The problem, they say, is that it’s very difficult to pinpoint a mechanism that can explain much of this. In fact, pick your explanation, and an economist can tell you a story for why it’s not true. They just can’t point you toward the one that is true.
We know, for instance, that taxes on the rich have fallen dramatically in recent decades. But the data on inequality are pre-tax. That is to say, they’re showing changes in who gets paid what, not who gets left with how much.
Immigration? Absolutely not. Might depress wages slightly at the very bottom of the economy, but it’s probably making the median American somewhat better off by making goods cheaper, and it might even be helping her wages by increasing demand for higher-skilled positions. And it doesn’t explain at all why the rich are getting so much richer.
Computers and associated technological change? Then why hasn’t inequality risen by as much in Europe? They’re into computers, too. And median wages actually did better in the 1990s, which is the decade most associated with the spread of information technology throughout the economy.
The decline of unions? The reigning estimate here is from Berkeley economist David Card. He thinks the decline might account for 15 to 20 percent of the problem. Many others consider that overstated.
International trade? Sorry. It just wasn’t a big enough factor between 1970 and 2000. Paul Krugman and others have begun to argue that since 2000—which is really to say, since China and India have come into their own as major exporters—that story has begun to change, and trade may be depressing American wages. That may be important going forward, but it doesn’t explain what’s happened so far.
But the debate has been shaken up by the sudden intervention of Jacob S. Hacker and Paul Pierson, two celebrated political scientists who, in their book Winner-Take-All Politics, argue that the problem isn’t with the explanations. It’s with the economists.
That diagnosis has some unlikely allies. Krugman, for one. The problem with the approach economists take, this Nobel Prize-winning economist has said, is that when their models miss something, so do they. “The temptation to only go for what’s ‘modelable’ is not entirely wrong,” he told me. “Unless you’re missing the story. And in this case, you’re missing the story.” In The Conscience of a Liberal, his book on inequality, he relied heavily on work done by Larry Bartels—a Princeton political scientist. The implication was clear: When there’s a multi-decade phenomenon that economists can’t seem to explain, maybe it’s about time to ask somebody else.
Hacker and Pierson have a theory of where the economists went awry: Economists might understand markets, they say, but they don’t understand politics. In markets, when big things change, it’s usually because something has happened. But in politics, big changes can be the result of something not happening. The rise of inequality, in Hacker and Pierson’s view, is the result of “systematic, prolonged failures of government to respond to the shifting realities of a dynamic economy.” They call this theory, in which big things happen because lots of other things don’t happen, “drift,” and it’s at the center of their story.
Their first—and most persuasive—piece of evidence is international: Germany, France, Japan, the Netherlands, Sweden, and Switzerland have seen almost no rise in inequality. Australia, Canada, Ireland, and the UK have seen a rise in inequality, but only half of what America has seen. And anyway, Hacker and Pierson say, if inequality was driven by politics, wouldn’t you expect to see more of it in the English-speaking countries that mirror America’s policy consensus most closely?
Then comes the question of timing: Why did it start in the 1970s? This has been the trouble for economists, as the economy didn’t undergo any self-evidently major changes. But it’s a red flag to political scientists, Hacker and Pierson say, because right about then, our politics underwent some extremely major changes.
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