The American Interest
March 20, 2017
Economic inequality is widely cited as the seedbed of social ills, sprouting plutocracy and corruption, stunting economic mobility, and suffocating the middle class. On this point, academic research and progressive political commentary regularly reinforce each other, a unanimity that conveys the impression of a rigorous scientific consensus. Adding to this collective refrain, Ganesh Sitaraman’s The Crisis of the Middle-Class Constitution: Why Economic Inequality Threatens Our Republic, analyzes the sociopolitical consequences of inequality from an historical perspective, categorizing economic equality as a constitutional issue.
Tracing concerns about inequality from ancient Greece to 21st-century America, Sitaraman’s historical narrative creates an intellectual backdrop for his empirical assessment of the impending danger expressed in the book’s title. A law professor at Vanderbilt University and one-time policy director for Senator Elizabeth Warren, Sitaraman’s interpretation of the perils of inequality is prompted by progressive political leanings. His main thesis links increasing economic inequality since the 1970s to a shrinking middle class, which threatens to undermine the political foundations of democratic society. A large middle class is seen as a political counterforce to the wealthy elite, who would otherwise run roughshod over the poor. The adverse effects of heightened inequality and a declining middle class can be summed up in a blunt equation: As concentrated wealth procures increasing political power, plutocracy displaces democracy.
Despite the popular perception that the middle class is being eroded by inequality, a careful examination of the empirical evidence is warranted for several reasons: The middle class can be defined in various ways; an accurate estimate of the degree of erosion is required to make a reasonable determination of the threat posed to the republic; and it is equally important to know where those ousted from the middle class end up.
Social scientists typically gauge middle-class status by income, education, and occupation, but the range of income, levels of education, and types of occupation vary. Recognizing that there are different conceptions of the middle class, Sitaraman initially defines them as “the group of people who aren’t extremely rich or extremely poor.” He then offers the further clarification that being middle class means “you have enough spending money to provide for yourself and your family without living hand to mouth, but not enough to guarantee their future.” These vague calibrations raise many doubts as to how one can possibly draw intelligible conclusions about who is in the middle class, whether the size of this group is actually shrinking, and, if so, where those being squeezed out land.
As evidence of the decline, Sitaraman refers to various qualitative case studies that offer an emotionally compelling portrayal of the struggles and distress in the daily lives of low-income families. Although such gripping stories tend to magnify the popular perception of a waning middle class, they are insufficient to sustain a critical generalization about the entire population. If the decline of the middle class is to be taken as a serious problem, we should at least have some accounting of its magnitude and results.
Toward the end of the book, Sitaraman invokes a firmer definition, pegging the collapse of the middle class to the Pew Research Center’s analysis, which classifies the middle class as those earning $42,000 to $126,000. According to this definition the Pew study found that, amid a growing population, the proportion of adults in the middle class declined by 11 percent between 1971 and 2015. About two-thirds of this decline is accounted for by a proportional increase among those in the upper-class income bracket, while the other third represents an expansion of those in the low-income range. It is not immediately self-evident how such a disproportionate growth of people in the upper-income bracket compared to the relatively small increase of those in the lower-income category threatens the future of the republic.
Moreover, when interpreting economic data about the shrinking middle class one should bear in mind that there are different ways to measure income. The Pew findings are based on household incomes before subtracting taxes and excluding the cash value of social transfers such as food stamps and subsidized housing. This is a relatively weak indicator of the financial resources families actually have to live on, particularly low-income households that tend to receive a broad package of social transfers that has increased over six-fold since the 1960s. In 2009, Federal expenditures on cash and in-kind transfers for low-income households amounted to approximately $16,000 per person—a sum that, if included in the measures of class and inequality, would diminish the magnitude of both the purported decline of the middle class and the increase in income inequality.
In addition to shrinking the middle class, Sitaraman claims that increasing inequality retards economic mobility. As evidence he relies on Alan Kruegar’s highly publicized “Great Gatsby Curve,” a small graph depicting a simplistic, two-variable relationship between income inequality and intergenerational mobility based on a sample of ten countries. Inequality rises as the levels of mobility decline over the ten countries, among which the United States had the highest level of inequality and next-to-lowest level of economic mobility. The academic authority conferred on this simple correlation derived from a very small sample of countries exemplifies a common tendency to endorse statistics one is predisposed to believe, particularly when they support prevailing assumptions about inequality. A closer examination of the data used to construct the Gatsby Curve reveals that the U.S. mobility score was selected from a body of research reporting 28 different findings; among these the mobility rate chosen to represent the United States was well below the average for the 28 studies and was based on an analysis of a relatively small sample of several hundred observations.
An entirely different story emerges from the more recent findings of a team of Berkeley and Harvard economists who analyzed 50 million tax returns in what is arguably the most extensive and rigorous study to date. Their research offers persuasive evidence that despite the increase in inequality, the rate of social mobility in the United States has not changed appreciably since at least 1971. According to the mobility rates found in this study, the United States should have had the fourth-highest level of mobility among the ten countries in the Great Gatsby Curve, which would have flattened out the curve considerably.
The claim that increasing economic inequality generates increasing political inequality, with wealthy elites coming to exercise control over public decision-making, is a common assertion that also eludes empirical validation. Sitaraman’s analysis of “ elites” who wield decisive political influence refers variously of the top 1 percent, business interest groups, the well-to-do, the affluent, and the top 10 percent.
It is indeed true that wealthy people have influence, and several serious studies in recent years attest to aspects of that influence. It would be naive to imagine that money is of little importance in politics, if for no other reason than so much of it is spent lubricating the electoral and policymaking processes ($6 billion on Federal elections alone in 2012). Democracy is an abrasive business intensified by the chaotic American style of interest-group politics, which involves 12,000 registered lobbyists who spent $3.2 billion plying their trade in 2014. In addition to the billionaires on both sides of the aisle (such as the Koch brothers and George Soros), as well as those who typically have given to both sides (such as Donald Trump), the interest-group legions include the 37 million-member AARP, the American Medical Association, public employee unions (six of which were among the 15 largest donors to national campaigns between 1989 and 2012) as well numerous corporate interests.
So, of course, money counts. On this issue, Sitaraman cites the findings of Princeton University Professor Martin Gilens’s award-winning study, which show a clear relationship between affluence and political influence.1 When examining this relationship over time, however, the data do not suggest that a rising degree of economic inequality has been associated with increasing political inequality. And the affluent respondents referred to in this study were a sample of citizens at the 90th percentile of the income distribution who earned about $135,000 a year—a substantial sum in 2010, but hardly enough to qualify as the extremely rich elite.
Sitaraman’s claim notwithstanding, there is no persuasive evidence that an increasing level of income inequality has a direct bearing on the degree of political power wielded by the elites. As a comprehensive review of the research by the American Political Science Association Task Force on Inequality and American Democracy cautiously concludes, “there is little evidence of a direct effect of rising economic inequality on widening political disparities.”2
In stark contrast to The Crisis of the Middle-Class Constitution, Edward Conard’s The Upside of Inequality: How Good Intentions Undermine the Middle Class introduces an alternative perspective, which challenges the prevailing assumptions that animate progressive interpretations of inequality. With an iconoclastic unraveling of empirical measures, Conard’s reading of the evidence calls into question Sitaraman’s assessment of the scale and dire consequences of inequality on almost every front.
Closely examining how the 11 percent decline of middle-income families was distributed between the upper- and lower-income categories, he points out that not only did 7 percent move into the upper-income group, but that Hispanic immigrants accounted for three-quarters of the 4 percent that enlarged the lower-income category. Absent the influx of lower-skilled immigrants between 1971 and 2015, the share of middle-class households in the American population would have experienced only a 1 percent shift downward at the same time as the number of upper-income families increased by 7 percent. In other words, middle-class people did not so much experience a downward shift as immigrants enlarged the data set. And for many if not most of these immigrants, gaining a foothold in the lower-income group represented a significant economic step upward compared to their position before coming to the United States.
Rather than casting economic inequality as the incubator of social ills, Conard sees it as the obligatory reward of merit, talent, and risk-taking, which drives the innovation and productivity that have created an unprecedented degree of prosperity for the vast majority of Americans. A visiting scholar at the American Enterprise Institute and founding partner at Bain Capital, he views the consequences of inequality from the other side of the political spectrum. Although endorsing the beneficial implications of inequality, he challenges the metrics frequently cited as evidence that inequality is on the rise as middle-class incomes stagnate. Drawing on Philip Armour, Richard Burkhauser, and Jeff Larrimore’s analysis, Conard points out that the growth in median household income between 1979 and 2007 jumped from a sluggish 2 percent to 34 percent when the calculation of income was adjusted for household size, taxes, healthcare benefits, and government transfer payments.3
But even when income is properly measured, consumption is a more meaningful metric of material well-being and equality than income. As Conard sees it, an individual’s consumption of resources is his true cost to the rest of society. Compared to low- and middle-income households, those in the higher brackets consume a smaller proportion of their incomes, with the balance invested in further production, which benefits others as well as themselves. As such, consumption is more evenly distributed than income and generates a lower estimate of inequality between the rich and poor.
Whereas Sitaraman finds wealthy elites exercising increasing power over elected officials, Conard claims to detect a consensus in the academic research showing that money exerts surprising little influence in politics. In one sense this may be true, if political influence is judged strictly according to election outcomes. Although hefty amounts are required to run for national and state offices, there is no evidence that the super-rich can buy elections. A more relevant gauge of influence, however, is the degree to which the interests of the rich shape political decision-making through a nebulous process of persuasion that can border on outright corruption and is difficult to quantify. Needless to say, unlawful exchanges also exist in the political arena, as evidenced by the fact—to take a vivid but hardly rare example—that more than half the Governors of Illinois between 1961 and 2009 ended up in prison.
Conard is not content merely to refute the degree of political power presumably exercised by the rich. He reverses the argument that since the 1970s rising inequality has generated an American plutocracy, claiming that the significant growth (between 1 to 4 percent of GDP) in government transfers to low-income households is indicative of a decline in the wealthy elite’s influence on political decision-making over this period.
This claim is hard to accept. Looking at all the data on direct government transfers reveals that from 1979 to 2007 the share of public benefits received by households in the bottom income quintile declined from 54 to 36 percent of the total, while the share accruing to those in the top two income quintiles rose from 17 to 25 percent. And these figures exclude indirect social transfers, such as home mortgage interest deductions and the Child Care Tax Credit, which heavily favor families in the higher income brackets. If the trend in transfer payments is taken as a valid marker of political influence, one might claim that the increasing share of benefits going to those in the upper-income brackets signifies a rise in their political power.
As one might expect, Sitaraman’s and Conard’s contrary interpretations of the degree and consequences of economic inequality in the United States come with proposals for reform, which are also at variance with one another. Among the policies intended to realign political power by rebuilding the middle class, Sitaraman recommends several well-known progressive measures such as: raising the minimum wage; ensuring affordable college education; increasing the redistribution of income through tax policies; strengthening unions; and reinforcing regulatory measures. Conard advances the familiar argument that raising the minimum wage will eliminate low-skilled jobs, along with supporting unions, which increase wages by monopolizing the supply of labor rather than boosting productivity. To improve the lot of low-wage workers, he favors a generous earned-income tax credit, while quietly voicing concern that it might dis-incentivize some workers.
More generally, Conard argues that instead of increasing economic growth, taxing the rich to further the redistribution of income reduces entrepreneurial incentives for risk-taking—widely held to be the driving force of capitalist innovation and productivity. This argument rests on a firm belief in the power of economic incentives and their compounding effects over time, the particulars of which remain unspecified. It may be true that increased tax rates dis-incentivize innovation. Yet California, the hub of tremendous entrepreneurial activity and technological innovation, has the highest state income tax in the country.
Although Conard and Sitaraman recognize the need for a highly skilled and educated workforce to propel economic growth, they offer different readings on the scope of this need and how to best address it. Citing the skyrocketing cost of higher education and the staggering student loan debt of over $1.2 trillion, Sitaraman opts for policies that advance more affordable or even free access to college education. Conard observes that tuition for two- and four-year public colleges is essentially free for students from low-income families (defined as under $80,000 at the University of California) and that the average student graduating from a four-year college borrows $27,000, which is about the price of a new car loan. Building a skilled workforce, from his perspective, involves reducing government subsidies for college students in the humanities and providing more to those in science and math, who are needed to fill the high-tech jobs that fuel growth in the 21st century. To this end, Conard also favors dramatically increasing high-skilled immigration as a strategy to accelerate economic growth.
Reading Sitaraman and Conard side-by-side leads one to wonder what really ails America’s political economy. To what extent does inequality represent the rightful rewards that motivate entrepreneurial risk-taking or the results of plutocratic influence-peddling? Is increasing inequality a sign that the rich are getting richer as the poor are getting poorer and the middle class is shrinking? Or is everyone’s standard of living on the rise? Is social mobility declining as inequality increases?
President Obama declared inequality to be the greatest challenge of our time, linking it to declining social mobility and a shrinking middle-class. These claims were frequently repeated and magnified by books, articles, and newspaper stories focused on the suffering of the chronic poor and unemployed. Although Sitaraman’s analysis confirms the prevailing view of an ailing society, Conard’s reading of the evidence conveys an alternative vision of prosperity that is more plausible.
Together, these two books (among others) form the platform for an enlightening debate that should have taken place (but didn’t) during the 2016 campaign, before the narrative was ceded to the leitmotif of “make America great again.” Now arguments based on actual evidence about core public policy issues seem to have gone out of style, at least in and around Washington. Today, arguments one dislikes are called not “mistaken” or “insufficiently supported by the data,” but rather “fake.” That gives new life to the old saw that Washington is the only town in the country where sound travels faster than light.
1See Gilens, Affluence and Influence: Economic Inequality and Political Power in America (University Press, 2012), winner of the 2013 Woodrow Wilson Foundation Award; see also Kay Lehman Schlozman, Sidney Verba, and Henry E. Brady, The Unheavenly Chorus: Unequal Political Voice and the Broken Promise of American Democracy (Princeton University Press, 2012); and Nolan McCarty, “The Political Roots of Inequality,” The American Interest (May/June 2013).
2American Political Science Association Task Force on Inequality and American Democracy, “American Democracy in an Age of Rising Inequality,” Perspectives on Politics (December 2004), p. 662.
3Philip Armour, Richard V. Burkhauser, and Jeff Larrimore, “Deconstructing Income and Income Inequality Measures: A Crosswalk from Market Income to Comprehensive Income,” American Economic Review (May 2013), pp. 173–177.