The American Interest
The answer to the question “Is America a plutocracy?” might seem either trivial or obvious depending on how one defines the term. Plutocracy, says the dictionary, simply means “rule by the rich.” If the query is taken literally to mean that the non-rich—the vast majority of American citizens—have no influence in American democracy, or that the country is self-consciously ruled by some hidden collusive elite, the answer is obviously “no.” On the other hand, if the question is taken to mean, “Do the wealthy have disproportionate political influence in the United States?” then the answer is obviously “yes”, and that answer would qualify as one of the most unsurprising imaginable. Wealthy people have had disproportionate influence in most polities at most times in history.
Of course, one can argue endlessly over who qualifies as being rich, whether the rich constitute a social class capable of collective action, how open or closed that class is, what constitutes real political power in today’s America, and so on. But if the question remains as simple as those articulated above, the basic answer will not change or be of much interest.
This is not, however, what this issue of The American Interest means by plutocracy. We mean not just rule by the rich, but rule by and for the rich. We mean, in other words, a state of affairs in which the rich influence government in such a way as to protect and expand their own wealth and influence, often at the expense of others. As the introductory essay to this issue shows, this influence may be exercised in four basic ways: lobbying to shift regulatory costs and other burdens away from corporations and onto the public at large; lobbying to affect the tax code so that the wealthy pay less; lobbying to allow the fullest possible use of corporate money in political campaigns; and, above all, lobbying to enable lobbying to go on with the fewest restrictions. Of these, the second has perhaps the deepest historical legacy.
Scandalous as it may sound to the ears of Republicans schooled in Reaganomics, one critical measure of the health of a modern democracy is its ability to legitimately extract taxes from its own elites. The most dysfunctional societies in the developing world are those whose elites succeed either in legally exempting themselves from taxation, or in taking advantage of lax enforcement to evade them, thereby shifting the burden of public expenditure onto the rest of society.
We therefore raise a different and more interesting set of questions regarding the relationship between money and power in contemporary America. All these questions come together, however, in a paramount puzzle: Why has a significant increase in income inequality in recent decades failed to generate political pressure from the left for redistributional redress, as similar trends did in earlier times? Instead, insofar as there is any populism bubbling from below in America today it comes from the Right, and its target is not just the “undeserving rich”—Wall Street “flip-it” shysters and their ilk—but, even more so, government policies intended to protect Americans from their predations. How do we explain this?
Let us start by describing the contemporary landscape in which this question arises. It is well established that income inequality has increased substantially in the United States over the past three decades, and that gains from the prolonged period of economic growth that ended in 2007–08 have gone disproportionately to the upper end of the richest layer of society. A study by Thomas Piketty and Emmanuel Saez shows that between 1978 and 2007, the share of U.S. income accruing to the top 1 percent of American families jumped from 9 to 23.5 percent of the total. These data point clearly to the stagnation of working class incomes in the United States: Real incomes for male workers peaked sometime back in the 1970s and have not recovered since.1
The growing disparity in outcomes has coincided with a period of conservative hegemony in American politics. Conservative ideas clearly had to do with the rise in inequality: The liberal (in the original 19th-century meaning of the term) economic model favored by Ronald Reagan was intended to open the doors to greater competition and entrepreneurship, which necessarily meant that gains from growth would go disproportionately to those best prepared to create wealth. Periods of rapid growth nearly always increase concentrations of capital and hence income inequality, but, as pro-market advocates have repeatedly told us, growth also nearly always trickles down over time to all or nearly all class cohorts.
As the years went by and those outsized gains at the top of the income distribution pyramid failed to trickle down in any substantial way, one would have expected growing demand for a left-leaning politics that sought, if not to equalize outcomes, then at least to bound their inequality. That did not happen. The Democratic Party, which one would have expected to be the principal focus of such political advocacy, floundered. It managed to regain majorities in the House and Senate, and it did hold the presidency between 1993 and 2001 (and, of course, regained it in 2009), but its electoral successes have not turned on economic fairness issues. To an unexpected degree, Democrats drank the Kool-Aid of market fundamentalism during the 1990s and in so doing reflected larger intellectual trends. (Indeed, when Al Gore’s 2000 campaign deigned to invoke class inequality issues as one of its themes, it arguably backfired.)
The financial crisis of 2008–09 has only deepened the mystery. The crisis laid bare some unpleasant facts about American capitalism. The banking industry lobbied heavily in the 1990s to further free itself from regulation, a trend that began in earnest with the Depository Institutions and Deregulation and Monetary Control Act of 1980. This resulted in, among other things, the 1999 Gramm-Leach-Bliley Act, which enabled the emergence of large “universal” banks and a non-transparent market in derivatives. Before the bust in the U.S. housing market, the rapidly expanding financial sector took home some 40 percent of all corporate profits, and yet it was responsible for an implosion that not only wiped out the banks themselves but imposed huge costs on innocent bystanders both in the United States and abroad. It also cost U.S. taxpayers an enormous sum in bailouts.
What was truly troubling, however, was that the collapse undermined the fundamental moral justification for material inequality in a politically egalitarian society. Basic to the legitimacy of market capitalism is the efficient market hypothesis—that is, the notion that in a truly competitive market everyone earns something close to his or her “social” rate of return. This means, in other words, that if your investment banker earns 100,000 times as much as your plumber, it’s because he or she is contributing roughly 100,000 times as much to society’s total pool of wealth.
The crisis made it glaringly obvious that the efficient market hypothesis was wrong: Oversized returns were flowing to innovative financial entrepreneurs who, in their avidity to create new and more complex financial instruments and products, were destroying rather than creating value for society as a whole. The crisis also shed bright light on the fact that corporate America was doing very well for its officers and shareholders (many of whom were not American citizens), but much less well for those Americans awaiting the trickle as jobs were outsourced and automated by the millions. Perhaps corporate America’s social rate of return approximated the expectations of the efficient market hypothesis, but only if “social” no longer referred to American society alone.
The crisis, exploding as it did in the midst of the 2008 presidential election, clearly helped Barack Obama at the expense of his Republican rival John McCain, in part because the public associated Wall Street with Republicans, and also, of course, because the debacle broke forth during the tenure of a Republican President. The new Administration went into office believing, however, that its victory signaled a fundamental realignment of American politics along the lines of the 1932 election that swept Franklin Roosevelt into power. Administration principals thought they had a mandate to move the country sharply to the Left—hence the fiscal stimulus bill, a bailout of the auto companies that left the government owning a large share of them, a major healthcare reform initiative, and an attempt to design a new regulatory framework for the banks.
But as it turned out, Obama was not riding a tide of left-wing populism. While the Democratic majorities in Congress succeeded in moving this ambitious legislative agenda forward, the results fell far short of expectations. The stimulus package did not produce stunning economic successes. The healthcare bill did not include a public option, and failed to address the real sources of cost inflation. Above all, the Dodd-Frank financial regulation reform bill did not change the perverse incentives that led to the crisis in the first place. Indeed, while Wall Street brought considerable opprobrium on itself, it was arguably the sector of the U.S. economy that suffered the least in the long run. Bank earnings were restored after a couple of quarters. And though the banks now face tougher regulation, Congress failed to do anything about the fact that investment banks are still too large and too interconnected to fail, and will surely be bailed out again when they get in trouble. Indeed, the U.S. financial sector is now concentrated in fewer hands than it was before the crisis.