Friday, November 19, 2010

Self-Reinforcing Inequality

Frank Pasquale

Equilibria are a commonplace of economic thought. For example, if there is a glut of grain, prices will go down, some producers will go out of business, and there will be less chance of a glut in the future. If an employer pays too little, employees will leave until wages hit a market equilibrium. Trends are self-limiting; winners eventually lose; a coin can't keep coming up heads forever.

Positive feedback loops pose a challenge to our usual, equilibrium-based thinking. There may be patterns of change that just keep intensifying. "Network effects" are a famous example, entrenching the dominance of a given company because it is already dominant. Income and wealth inequality may be another.

US inequality has increased markedly over the past few decades. Whereas "Latin America has matured and become more equal in recent decades, . . . the distribution in the United States has become steadily more unequal." Despite the extraordinary economic pain suffered by those at the bottom of the US economic ladder, the 112th House of Representatives wants to "give the richest 0.1 percent of Americans an average tax cut of $370,000" while slashing spending for social programs.

Channeling Resentments

There are many in that richest 0.1% who can employ current members of Congress (or their family members) once they leave office, and they probably donate far more to political campaigns than the bottom half of taxpayers. (Given loopholes in the campaign finance laws, it may take very intensive research to determine exactly what their impact is.) Some "patriotic millionaires" work the other side of the aisle. But, as Thomas Pogge has stated,

The most affluent understand very well that their future wealth is affected by the social rules. They will therefore generally use their influence on the design of the social rules towards defending and expanding their advantages. The richer the top 10 percent are relative to the rest of the population, the more their interests will differ from the interests of the rest and the greater their influence on the design of the social rules will be relative to the influence of the majority.

What is less well understood is how the very rich influence the rest. Recent research by political scientists Enns & Kelly indicates that there are inequality-reinforcing trends in public opinion, too:

You might think that in a time when more money is concentrated in fewer hands and incomes vary wildly from billions to subsistence, poor people might increase their support for government policies that offer some help. . . . [But the researchers] found that as inequality rises, low income individuals' attitudes toward redistribution become more conservative. "Once inequality starts going back up, it appears to be perpetuated by public opinion. If inequality declined in the United States, our results suggest that then the public would become more supportive of government redistribution."

Perhaps "we the people" are more shaped by politics than vice versa. The decisive George W. Bush not only committed the US to tax breaks tilted toward the wealthiest, but also helped create a country more receptive to future demands for the same policies.

Everyday experience also helps explain the trend. In Griftopia, Matt Taibbi interviews members of the US Tea Party. He reports that their views of government arise out of their interactions with officials at the IRS, DMV, TSA, zoning boards, or similar agencies: stressful, one-shot interactions with bored, inattentive, or hostile bureaucrats. They project that experience onto places like the SEC, CFTC, FCC, or Fed---assuming that the world of DC agencies is just as exasperating for the multinational corporations regulated by these agencies as local government is for them. They have little sense of the revolving door of high bureaucracy, where the regulators are often on the lookout for jobs at regulated entities. An IRS auditor has no prospect of one day working for a middle class auditee, but MMS staffers have often been smitten with the companies they inspect. (As one report puts it, "The cozy ties included workers who moved between industry and government jobs 'with ease'--- friends who've 'often known each other since childhood.'")

So a Tea Partier exasperated by DMV incompetence may vote for a party committed to making the MMS inspectors even poorer and more reliant on an eventual big payday at a company they regulate. Lower government wages will likely provoke the TSA/DMV/IRS crowd to be ever surlier to the public, while making the SEC/CFTC/FCC crowd ever more dependent on a big private sector payday. And so the cycle continues.

Joint Committee on Taxation Comparison of Democratic and Republican Tax Plans:

Cognitive Dissonance and Stagnation

Moreover, as Bloomberg's Drake Bennett reported a few weeks ago, even residual preferences for equality are easily trumped by memes:

Studies have . . . shown that voters have an impressive ability to absorb information that contradicts their beliefs without letting it change their minds. People support the abstract goal of equality, it seems, while staunchly opposing specific government measures—-whether increasing tax rates or limiting executive pay-—designed to impose it.

Moreover, if government repeatedly fails to alter markets to deliver more equality, voters may simply conclude it is not up to the task. They may even depoliticize questions of economic justice entirely, as Bernard Harcourt's work suggests.

Enns & Kelly's paper adumbrates one exit from self-reinforcing inequality: a charismatic leader and cooperative Congress may start a virtuous cycle of redistribution, catalyzing more positive public attitudes toward the concrete steps needed to make society more equal. But I doubt that can happen, either. As Hacker and Pierson's recent Winner Take All Politics argues, the filibuster rule in the Senate has marooned us in an era of legislative drift and policy change via regulatory arbitrage. As one reviewer of the book (Henry Farrell) explains,

Over time, policies become increasingly disconnected from their original purposes, or actors find loopholes or ambiguities through which they can subvert the intention of a policy (for example – the favorable tax regime under which hedge fund managers are able to treat their income at a low tax rate). If it is impossible to rectify policies to deal with these problems, then drift leads to policy change – Hacker and Pierson suggest that it is one of the most important forms of such change in the US.

Moreover, as Farrell notes, "There are many very influential organizations pushing the interests of business and of the rich . . . . [and] they typically trump voters (who lack information, are myopic, are not focused on the long term) in shaping policy decisions." Already the implementation of Dodd-Frank appears to be going in this direction, as "3,659 lobbyists worked for companies that explicitly lobbied on the Dodd-Frank bill" in the first nine months of 2010. Over half of voters are unaware that the Republicans just won the House of Representatives; it's hard to imagine them pressing either party for, say, better derivatives regulation.

Democratic theorists used to worry about the bottom half of the population voting itself the wealth of the top half. For a few years in the 1930s, waves of enthusiasm for "Share our Wealth" programs briefly vindicated their concerns. But in our time, the US has become a reliable engine of inequality, which itself promotes the very policies which created it.

Image Credit: Joint Committee on Taxation Comparison of Democratic and Republican Tax Plans.

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