Alexis de Tocqueville began his classic description of democracy in America by remarking that what struck him most about the strange new country he visited in the early 1830s was “the general equality of condition among the people.” Much of the rest of what he wrote was an elaboration of what this equality meant, and why it mattered. Tocqueville saw, of course, that some Americans had more money, and enjoyed greater social status and political influence, than others. But “though there are rich men,” he explained, “the class of rich men does not exist; for these rich individuals have no feelings or purposes, no traditions or hopes, in common.”
Tocqueville also warned, however, of a force that threatened in time to undermine this democracy grounded on equality. The danger he saw was economic, arising from the increasingly hierarchical structure of business activity: eventually, he feared, “the master and the workman have then here no similarity, and…are connected only like the two rings at the extremities of a long chain…. What is this but aristocracy?” He concluded that “if ever a permanent inequality of conditions and aristocracy again penetrates into the world, it may be predicted that this is the gate by which they will enter.”
Many observers of America today think Tocqueville’s fears have become reality. The gap between “masters” and “workmen” has widened beyond anything he could have envisioned. And, in contrast to what Tocqueville observed in the still-new republic, today there certainly is a “class of rich men.” No one doubts that the children and grandchildren of today’s top hedge fund managers and Internet entrepreneurs will enjoy privileged positions for generations to come.
The problem is threefold. First, contrary to what most economists of the early post–World War II generation expected, inequality in the United States has now been widening for the past four decades.1 Especially at the very top of the scale—not just the top 1 percent, but even more so the top 0.01 percent—the increases in income and wealth have been enormous. For most other Americans, incomes have been stagnant; with the decline in house prices, so has their wealth. In the recent setting of only modest overall economic growth, this widening inequality has meant that almost all of what economic gains have occurred accrued to those at the top. From 2000 until the financial crisis hit in 2007, total production in the United States expanded by 18 percent after allowing for inflation; the income of the family just at the middle of the nation’s income distribution rose by not even one half of one percent.
Second, the spectacular successes of a few entrepreneurs notwithstanding, it has become harder for Americans to move up (or down) the economic scale than it used to be. Measuring economic mobility is notoriously difficult, but the evidence increasingly suggests that movement along the economic spectrum, from one generation to the next within families, is now less common in the United States than in many other high-income countries, including Germany, France, Japan, and Canada.2 Part of what underlies Americans’ traditional tolerance for greater inequality than in other countries is the belief that in this country anyone can get ahead, and those who do so mostly deserve to. Without that presumption, today’s ever-widening economic gaps seem much less palatable.
Third, American electoral politics is increasingly a matter of money. Campaign spending in this year’s election will far exceed even the record-breaking pace of four years ago. Election coverage on television and other mainline media now devotes as much attention to the candidates’ fund-raising success as to their policy positions and attendance at their rallies. In part the change is technological, centered on the importance, and the cost, of television advertising. But legal decisions have mattered too, especially the breakdown of campaign-financing laws and the Supreme Court’s Citizens United decision allowing unlimited (and often anonymous) contributions, including those from businesses, to political groups aligned with but supposedly independent of the candidates.
It is the mutually reinforcing combination of these three forces that makes Tocqueville’s long-ago prediction seem prescient. A “class of rich men” now exists. Its income and wealth are steadily growing, both absolutely and as a share of the nationwide totals, while the majority of American families are experiencing economic stagnation or decline. Unlike in the Gilded Age of the late nineteenth century, when economic inequality in the United States was also wide and widening, today entry even to the beleaguered middle class is increasingly difficult for those not born into it. And those at the top are increasingly able to use the political system to maintain the arrangements that support these patterns.
Leaving aside the Supreme Court’s role, much of the public discussion of these regrettable developments has focused on technological change and other impersonal market forces. Changing modes of production reward some workers’ skills and devalue others’. The entry of China and India into the world economy has greatly enlarged the relevant supply of labor with which Americans compete. So has immigration, both legal and other. Advances in electronic communications and improvements in overseas transportation have rendered a much broader array of goods and services subject to international competition. Television has altered how politicians campaign for office. The standard arguments are familiar.
Hedrick Smith, the Pulitzer Prize–winning former reporter for The New York Times and author of widely read books like The Power Game and The New Russians, has a different explanation. In Who Stole the American Dream? Smith usefully emphasizes that developments like inequality and immobility and paid-for political influence reinforce one another. “Wealth begets wealth,” he writes, “especially when reinforced through the influence of money in politics. Then the hyperconcentration of wealth aggravates the political cleavages in our society.” As a result, “America has evolved into a caste society, increasingly stratified in terms of wealth and income…. Increasingly, privilege sustains privilege; poverty begets poverty.”
But Smith sees these developments as the product not of impersonal forces like technology but of deliberate choice, springing from a historically new “mind-set,” as he calls it, almost a form of conspiracy, among those who have benefited. He begins his story with an account of a memorandum written in August 1971 by Lewis Powell, then practicing law in Virginia and soon to be nominated to the US Supreme Court. According to Smith,
Powell’s intention was to spark a full-scale political rebellion by America’s corporate leaders… to change the political and policy mainstream in Washington and to put the nation on a new track, a track more favorable to business. And he succeeded.
With Powell’s memo as the catalyst, other familiar actors—William F. Buckley Jr. and his National Review, Irving Kristol with The Public Interest, Milton Friedman and a phalanx of University of Chicago economists—helped create “a huge swing of the policy pendulum in favor of the corporate elite—at the expense of the middle class.” Soon business corporations set up lobbying offices in Washington: more than 2,400 of them by ten years later, compared to fewer than two hundred at the time Powell wrote. The largest firms also banded together in new organizations, most prominently the Business Roundtable. Smaller firms joined the National Federation of Independent Business, which grew from three hundred members when Powell wrote to over 600,000 at the end of the decade. Donors funded new conservative think tanks, also headquartered in Washington, like the Heritage Foundation and the Cato Institute. Political organizers, especially in the Republican Party, pushed the pro-business, anti-labor policy agenda.
The consequence, in Smith’s account, was a series of policy choices that systematically favored employers over workers, rich over poor, business over consumers. Tax rates, minimum wage rates, union organizing rules, financial deregulation, pension arrangements, safety net eligibility and funding, campaign financing laws—all became “strongly tilted in favor of the business, financial, and corporate elites.” In parallel, corporate executives adopted a new attitude toward their workforce, continually raising their own pay and benefits at the expense of their workers’ pay, benefits, and jobs (and, in many cases, at the expense of their shareholders too). In time these policy choices and business decisions
dismantled the political and economic infrastructures that underpinned the great era of middle-class prosperity in the 1950s, ’60s, and ’70s [and caused] the unraveling of the American Dream for the middle class.
In political terms, “we have moved from a broad populism to a narrow plutocracy.”
The argument is important. It not only represents a different account of how “we have become Two Americas…divided by power, money and ideology”; its emphasis on conscious choice, indeed collusion, by the few who have benefited represents a distinct alternative to the usual focus on technological change, globalization, and the like. It also opens up broader avenues for redress. Technological change is difficult to resist, and globalization nearly as much so, but reversing consciously made choices is a matter of changing one’s mind—or, more likely, changing whose mind matters for the choices to be made. With his alternative historical explanation in hand, Smith goes on to present his plan for “reclaiming the dream.”
The problem is that Smith doesn’t make his alternative explanation persuasive. He amply documents the widening inequality, reduced mobility, and increasing role of money in politics that have beset America in recent years, relying on not just the usual statistics but also vignettes involving both well-known figures and everyday citizens whom he has interviewed. Many of the book’s chapters on more specific phenomena—globalization, offshoring, deregulation, business cost-cutting, predatory mortgage lending, military “overstretch,” the change from traditional defined-benefit pensions to 401(k) plans, even the evolution from political bipartisanship when Dwight Eisenhower was president and Lyndon Johnson the Senate majority leader to today’s bitter gridlock (a story that he tells especially well)—are likewise informative and well presented. But they too mostly follow the lines of the now familiar debate on such matters rather than supporting the case for an underlying conspiracy, much less one specifically triggered by Lewis Powell’s memo.
Smith succeeds, I think, in showing that there has been “a fundamental shift in the collective attitudes of American CEOs.” Today firms cut jobs and squeeze their workers’ pay and benefits when times are tough, in order to meet the competition and stay in business; and they also do so when times are more flush, in order to boost profits; top executives’ pay goes up under either circumstance. It used not to be so. A generation ago firms took a more benevolent (critics would say paternalistic) view of their workers, and a good many executives exercised restraint in what they chose to pay themselves. Now both sets of decisions are mostly a matter of what the market will bear. But what’s missing in Who Stole the American Dream? is an account linking all this—together with lower top-bracket tax rates, tougher rules restricting unions, and other important government policy changes—to a coordinated plan consciously engineered by a group of willful individuals who stood to benefit.
1 For a useful review of the facts surrounding recent trends in inequality, and of the economic literature seeking to explain it, see Timothy Noah, The Great Divergence: America’s Growing Inequality Crisis and What We Can Do About It (Bloomsbury, 2012). ↩
2 See, for example, Miles Corak, “Do Poor Children Become Poor Adults? Lessons from a Cross Country Comparison of Generational Earnings Mobility,” Research in Income Inequality, Vol. 13 (2006). ↩
For a useful review of the facts surrounding recent trends in inequality, and of the economic literature seeking to explain it, see Timothy Noah, The Great Divergence: America’s Growing Inequality Crisis and What We Can Do About It (Bloomsbury, 2012). ↩
See, for example, Miles Corak, “Do Poor Children Become Poor Adults? Lessons from a Cross Country Comparison of Generational Earnings Mobility,” Research in Income Inequality, Vol. 13 (2006). ↩