On the Triumph of the Rich

What are the relative contributions of structural changes and political campaigns in the stunning growth of inequality since 1973?

Mike asks:

How did the few people so rich that they really don’t need much from government – maybe a Coast Guard to pick them off their yachts in case of trouble – contrive to get an exploding share of the value created by everyone’s labor since 1980?

Mike, was it simply — or even mostly — about contrivance?  I yield to no one in my hatred of conservative distributional policies, at least on an outpatient basis, but there were long-term trends in the economy that certainly helped.  Globalization made unions weaker.  And as Bob Frank points out in Falling Behind, one critical development was the winner-take-all economy, in which technology facilitated the creative destruction of entire lines of work.  Bob’s example is that of local accountants, thousands of whom lost their jobs when TurboTax and Kiplinger Tax Cut came on-line 15 or so years ago.

I don’t want to underestimate the effect of policy, and in particular, the ability of the GOP Southern Strategy to convince white voters that government programs = handouts for Blacks, but I think we do need to discuss the important structural factors if we are going to reverse the trend.

Author: Jonathan Zasloff

Jonathan Zasloff teaches Torts, Land Use, Environmental Law, Comparative Urban Planning Law, Legal History, and Public Policy Clinic - Land Use, the Environment and Local Government. He grew up and still lives in the San Fernando Valley, about which he remains immensely proud (to the mystification of his friends and colleagues). After graduating from Yale Law School, and while clerking for a federal appeals court judge in Boston, he decided to return to Los Angeles shortly after the January 1994 Northridge earthquake, reasoning that he would gladly risk tremors in order to avoid the average New England wind chill temperature of negative 55 degrees. Professor Zasloff has a keen interest in world politics; he holds a PhD in the history of American foreign policy from Harvard and an M.Phil. in International Relations from Cambridge University. Much of his recent work concerns the influence of lawyers and legalism in US external relations, and has published articles on these subjects in the New York University Law Review and the Yale Law Journal. More generally, his recent interests focus on the response of public institutions to social problems, and the role of ideology in framing policy responses. Professor Zasloff has long been active in state and local politics and policy. He recently co-authored an article discussing the relationship of Proposition 13 (California's landmark tax limitation initiative) and school finance reform, and served for several years as a senior policy advisor to the Speaker of California Assembly. His practice background reflects these interests: for two years, he represented welfare recipients attempting to obtain child care benefits and microbusinesses in low income areas. He then practiced for two more years at one of Los Angeles' leading public interest environmental and land use firms, challenging poorly planned development and working to expand the network of the city's urban park system. He currently serves as a member of the boards of the Santa Monica Mountains Conservancy (a state agency charged with purchasing and protecting open space), the Los Angeles Center for Law and Justice (the leading legal service firm for low-income clients in east Los Angeles), and Friends of Israel's Environment. Professor Zasloff's other major activity consists in explaining the Triangle Offense to his very patient wife, Kathy.

14 thoughts on “On the Triumph of the Rich”

  1. I am a progressive taxation guy myself; I would have government work harder at shrinking the income and wealth gaps. But that said, it is not immediately obvious that either of the two examples discussed qualify as "rich stick it to the poor" — or are obviously such bad things even from a perspective such as mine. Winner-all-phenomena are variable in their effects, but some provide inexpensive service for the masses — as in entertainment. And who benefits from tthe demise of those local accountants? Some software makers, of course, but also a lot of small businesses and middle class consumers who get cheaper bookkeeping and tax preparation. Figuring out who is really better off over significant periods of time, and how, is harder than sometimes assumed.

  2. I figure a lot of the increasing inequality is combination of the Pareto principal (the 80/20 rule) and globalization. When the base of the pyramid gets bigger the pyramid gets taller. You add half a billion Chinese workers to the globalized economy and the richest will be a lot richer. It wasn't the hard work or intelligence of the plutocracy that caused that to happen so you might as well tax away that windfall and return it to the public.

  3. The bigger trouble with turbo-tax and the like is not that they put accountants out of business, but that our tax code is so complex, we need to waste days every year staying in compliance with it. (and optimizing our health care savings accounts to maximize our pre-tax spending, rather than doing things we actually enjoy, like eating chocolate an hugging our children.)

    Tax optimization is a deadweight loss.

  4. I saw Mike's question back when it was just a wee comment, but I did not have time to quibble with it then. But I do now.

    The rich get a hell of a lot more from government than protection of their soggy asses by the Coast Guard. The MAIN thing rich people get from government is … PROTECTION FROM OTHER RICH PEOPLE. The TurboTax thing is a great example of what I mean.

    What allows you (the publisher of TurboTax) to get rich? Government protection of your IP, that's what. And not just protection against individuals who might "lend" a copy of your program to their friends. That's penny-ante stuff. No, who you need protection from is some other rich person with the capital to mass-produce pirated copies of your program and sell it for half the price. What allows you, the buyer of a credit default swap, to collect the billion dollars you're entitled to when the bond you insured goes down? Government enforcement of contracts, that's what. You might say "Wait a minute! Government is not necessary. If my counterparty welshes on the CDS he will never do business in this town again, government or no government." True enough, but a billion dollars is enough money that maybe your counterparty figures "Hey, I don't need to do any more business in any town ever again, so screw you."

    Government does not provide a service to ME by standing ready to enforce contracts between Warren Buffett and Goldman Sachs. It provides a service to Warren Buffett and Goldman Sachs. Sure, it also stands ready to enforce a contract between you and me. But neither you nor I do billion-dollar deals with each other. There's no way we can rip each other off for really serious money. Only rich people can do that, and only to each other. That's why really rich people need government way more than us ordinary yokels do — and why the smart ones among them are perfectly happy to pay for it.

    –TP

  5. @Tony P.,

    I'd disagree that the primary government service for the rich is protection from other rich people. The primary government service provided for the rich is protection from the poor.

    Government protection of the rich is the only thing preventing the poor from showing up at Goldman Sachs headquarters (etc) and helping themselves create a flatter wealth distribution curve.

    Stealing money from the bottom four quintiles has a habit of being defined as legal business while the reverse tends to be classed as theft, robbery or fraud.

  6. "…why the smart ones are perfectly happ to pay for it." Seems to me the smart ones are perfectly happy to make the yokels pay for it.

  7. Rising inequality is a worldwide trend http://www.carnegieendowment.org/publications/ind… so US-only explanations don't work, except to explain the diiferential between the USA and other rich countries.

    Partly the invisible hand, no doubt: the rising share of winner-take all industries like entertainment and high finance. But class warfare counts for something too, for instance the Bush tax cuts. There's a neat little theorem of Doald Wittman's to explain why democracies don't expropriate the rich few and redistribute to the poor many: imagine a standoff between the bottom 51% and the top 49%. The latter can can readily bribe the middle 2% to defect (the bribe is the benefot of expropriation plus $1). Similarly from 47% to 49%, so you can see how the top 5% can construct a majority at affordable cost. Tracks Bismarck and Disraeli quite well.

  8. @ Wimberley:

    So how does the Wittman theorem explain what we see in America: 90% screwed; 9% OK; .9% good; .1% getting most of the goodies? You could argue that the 0.1% is bribing the next 9.9%. But it doesn't work much below that.

  9. OK, let's talk structural. The only reason rich people exist is because the rest of us create them. We work for them, we buy their shit, and we pay their service charges. They then use our money against us, buying legislation that protects their wealth and power. It's a trickle up system.

    One way to stop it is to stop feeding the rich. Arrest the trickle up system. Keep the money amongst ourselves, cut them out of the loop. Hyper-local buying habits keeps the wealth from flowing to that upper-class ocean, and spreads it around amongst people we know. Stop buying media on Amazon, find local alternatives for chain stores whenever possible. That's one step. Local banking and investing is another. Any way you can think of to keep wealth (pennies at a time) from flowing into the pockets of the wealthy. And tell your friends.

    If we refuse to feed the rich, they eventually cease to exist.

  10. I agree that Michael's statement

    How did the few people so rich that they really don’t need much from government – maybe a Coast Guard to pick them off their yachts in case of trouble – contrive to get an exploding share of the value created by everyone’s labor since 1980?

    contains the source of the problem.

    The idea that the rich don't really need much from government is absurd. There is no part of the population which needs more from government than the rich. Never in the history or mankind, nowhere on the face of the earth have there been people who could reasonably called rich without there also being a government. It is only in very recent times that poorer people have come to benefit substantially from government.

    But we can be more specific about where this benefit is than saying the government protects the rich from the rich or the rich from the poor. The government provides a number of very valuable services which form the foundation of the wealth of any rich person. The protection of investments provided by incorporation, licensing the radio spectrum, copyrights, trade negotiations with other nations, and many more in addition. For the past several decades the value of these services that are provided by the government have been steadily increasing and simultaneously we have been systematically lower the prices charged. Is there really any reason to wonder why those whose income depends on these services are becoming richer compared to those who do not?

  11. Nate Biehl, I like the spirit of your plea. I, too, would like to find a way to stop feeding the rich. One way to do that would be simple enough, in principle: if you're paying 25% interest on a $10K credit card balance, and I am getting 0.25% interest on $10K in my savings account, we're both overlooking an opportunity. Or maybe not: we don't know each other; there's effort involved to match us up, not to mention risk, and the middleman who puts in the effort and bears the risk won't do it without some compensation for himself. Still, you'd think that a 24.75% spread leaves room for all three of us to come out ahead.

    I bring up this particular example for several reasons. For one, money is unique. Much as I'd like to, I cannot figure out a way to buy a hyperlocally-produced, hand-crafted disk drive. No farmer in my neighborhood grows coffee. The natural gas that heats my house in winter absolutely requires massive concentrations of capital to get it here. The "goods and services" most of us spend most of our money on do not lend themselves to local, small-scale, cut-out-the-middleman approaches. Money is different.

    Another thing: handling money is big, big business. Much of the "growth" in GDP for the past couple of decades has been in "financial services". Many of the rich owe their fortunes to the cut they take for handling our money. Figuring out how to handle our own money, amongst ourselves, seems like a pretty potent way to stop feeding at least some of the rich.

    –TP

  12. "Figuring out how to handle our own money, amongst ourselves, seems like a pretty potent way to stop feeding at least some of the rich."

    PayPal thought they had that figured out until they succumbed to government regulation like everyone else.

  13. Nate Biehl:

    You mean you want all us non-plutocrats to "go Galt"?

    (That used to be called going on strike, but here in Year-of-our-Lord-Reagan 30, the word 'strike' is an unthought.)

  14. Tony P — Turn down your thermostat; install a simple black box solar water pre-heater on your roof; buy fair-trade coffee from a local roaster; keep your computer for 10 years.

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