Introduction Introduction The Thirty-Year War
For those working on Wall Street, 2009 was a very good year. At the thirty-eight biggest companies, investors and executives earned a staggering $140 billion in all—the highest number on record.1 The venerable investment firm Goldman Sachs paid its employees nearly a half million dollers each, capping off one of the best years since its founding in 1869.2 The sums, while astounding, were hardly unprecedented. Unfettered pay had become the norm on Wall Street over the prior generation, as it had in American boardrooms more broadly. The CEO of Goldman Sachs, Lloyd C. Blankfein, had taken home $68 million in 2007. That same year, the top twenty-five hedge fund managers raked in $892 million on average, according to Alpha magazine’s annual ranking of the highest earners—Wall Street’s equivalent of People magazine’s “most beautiful people.”3
What made the 2009 payouts so shocking wasn’t the numbers themselves. It was what they said about the American economy—and American government. The Wall Street of well-heeled bankers was thriving, while the Main Street of ordinary workers struggled amid the worst economic downturn since the Great Depression. And Wall Street was thriving because less than two years before it had received hundreds of billions in federal bailout money, along with less visible but far more massive indirect assistance from the Federal Reserve. In the wake of the financial crisis—a crisis prompted in no small part by banks’ reckless practices—government had shoveled cash in the front doors of the nation’s leading financial institutions to avert catastrophe. Now Goldman and other big firms were, in essence, discreetly but steadily shoveling a large share of that cash out the back doors into employees’ private accounts.
For the very top earners, the payouts were actually less ostentatious than usual, lest they make more conspicuous the scale of the unexpected riches. Big paychecks looked bad, after all, when the rest of the economy was staggering, and when Wall Street lobbyists were ferociously battling proposed reforms of the financial system to clip the banks’ wings and forestall another bailout. Out, for the most part, were seven- and eight-figure bonuses. In were complicated “stock options” and “deferred compensation” that promised equally big returns down the road. As the New York Times helpfully explained, “Wall Street is confronting a dilemma of riches: How to wrap its eye-popping paychecks in a mantle of moderation.”4
This was not exactly the dilemma faced by most Americans. While the money spigot flowed freely on Wall Street, the “real economy” remained trapped under the debris of the financial implosion of 2007. Even as Blankfein insisted that Goldman was doing “God’s work”—apparently missing the passage in the Bible about how hard it is for a rich man to enter heaven—tens of millions of homeowners were still reeling from the real estate crash that firms like his had helped create through heedless speculation in securities underwritten by subprime loans.5 Nationwide, home prices had plummeted, wiping out nearly 40 percent of American families’ home equity between December 2006 and December 2008.6 The unemployment rate hovered around 10 percent. For every job opening, there were six job seekers.7 State and local governments faced with unprecedented budget deficits were slashing gaping holes in the safety net, raising taxes, and threatening to lay off hundreds of thousands of teachers. Leading economists suggested it would be years before the country returned to full employment. The human toll—in shattered careers, disrupted families, and lost security—was incalculable.
These two starkly divergent tales of 2009 represent just the most recent and painful chapter of a longer story. Over the last generation, more and more of the rewards of growth have gone to the rich and superrich. The rest of America, from the poor through the upper middle class, has fallen further and further behind. Like Wall Street’s deep-pocketed denizens in 2009, the very richest of Americans have shot into the economic stratosphere, leaving middle- and working-class Americans to watch their fortunate fellowmen’s ascent while remaining firmly planted on economic terra firma. In the phrase that leads this book’s title, the American economy has become “winner-take-all.”
Consider the astonishing statistics. From 1979 until the eve of the Great Recession, the top one percent received 36 percent of all gains in household income—even after taking into account the value of employer-sponsored health insurance, all federal taxes, and all government benefits.8 (We will examine this “DNA evidence,” which provides irrefutable proof of the hyperconcentration of economic gains at the top, in the next chapter.) Economic growth was even more skewed between 2001 and 2006, during which the share of income gains going to the top one percent was over 53 percent. That’s right: More than 50 cents of every dollar in additional income pocketed by Americans over this half decade accrued to the richest 1 in 100 households.
Even more striking, the top 0.1 percent—one out of every thousand households—received over 20 percent of all after-tax income gains between 1979 and 2005, compared with the 13.5 percent enjoyed by the bottom 60 percent of households. If the total income growth of these years were a pie, in other words, the slice enjoyed by the roughly 300,000 people in the top tenth of 1 percent would be half again as large as the slice enjoyed by the roughly 180 million in the bottom 60 percent. Little wonder that the share of Americans who see the United States as divided between “haves” and “have nots” has risen sharply over the past two decades—although, as we will see, the economic winners are more accurately portrayed as the “have-it-alls,” so concentrated have the gains been at the very, very top.9
These mind-boggling differences have no precedent in the forty years of shared prosperity that marked the U.S. economy before the late 1970s. Nor do they have any real parallel elsewhere in the advanced industrial world. A generation ago, the United States was a recognizable, if somewhat more unequal, member of the cluster of affluent democracies known as mixed economies, where fast growth was widely shared. No more. Since around 1980, we have drifted away from that mixed-economy cluster, and traveled a considerable distance toward another: the capitalist oligarchies, like Brazil, Mexico, and Russia, with their much greater concentration of economic bounty. Of course, the United States is far richer than these oligarchic nations. But, contrary to the rhetoric of inequality’s apologists, it has not grown consistently more quickly than other rich democracies that have seen little or no tilt toward winner-take-all. America’s runaway rewards for the affluent have not unleashed an economic miracle whose rewards have generously filtered down to the poor and middle class.
Quite the opposite. Like a raging fever that announces a more serious underlying disease, rising inequality is only the clearest indicator of an economic transformation that has touched virtually every aspect of Americans’ standard of living. From the erosion of job security to the declining reach of health insurance, from the rising toll of home foreclosures to the growing numbers of personal bankruptcies, from the stagnation of upward social mobility to the skyrocketing of personal debt, the American economy that has delivered so much to the fortunate has worked much less well for most Americans. And this has been true not just over the past three years or thirteen years, but over the past thirty years. Winner-take-all has become the defining feature of American economic life.
How has this happened? If most commentators are to be believed, the answer lies in inevitable shifts in our economy driven by global, universal pressures. Like a doctor forced to dispense difficult truths to a patient in denial, these economic diagnosticians tell us that the shared prosperity of the postwar generation was rooted in a sheltered, low-tech economy that is not coming back. A technological revolution has rendered the world “flat,” sweeping away differences rooted in culture and politics and policy. In today’s highly globalized and competitive environment, educational achievements and workplace skills are economic destiny, and deep economic cleavages based on those achievements and skills are all but inevitable.
This diagnosis has its distinctive ideological spins, of course: On the one side, liberal economic doctors call for massive investments in education to give more people a shot at entering the winner’s circle. On the other side, conservative economic doctors call for more tax cuts and deregulation to unleash the competitive economy still further, with promises that, at some point soon, the gains will “trickle down.” But whatever the prescription, the diagnosis ultimately points to the same constellation of factors. Globalization, skill shifts, technological transformation, economic change—the list is familiar from the seemingly endless autopsies that crunch the numbers and report, to use James Carville’s famous catchphrase, It’s the economy, stupid.
Winner-Take-All Politics offers a very different diagnosis, one rooted in a very different sort of exploration. Rather than doctors dispensing difficult truths, we see ourselves as investigators uncovering buried clues that point to culprits beyond the usual suspects most analysts have fingered. The truths that we find share little in common with the familiar nostrums about the natural course of the American economy. Yet, in some respects, they offer an even more disturbing assessment. They strip away the aura of economic destiny surrounding runaway inequality. But they replace the certainty of a false economic diagnosis with discomforting conclusions—along with a new set of puzzles—about how, and for whom, American politics works.
The puzzles are all around us. How can hedge-fund managers who are pulling down billions sometimes pay a lower tax rate than do their secretaries? And why, in an era of increased economic uncertainty, is it so hard for their secretaries to form or join a union? How have corporate managers—who, along with Wall Street bigwigs, make up more than half of the top 0.1 percent—ascended from pay levels twenty to thirty times that of a typical worker to levels two to three hundred times as great?10 And why, over a generation in which most Americans have experienced modest economic gains, have politicians slashed taxes on the rich even as the riches of the rich have exploded?
To answer these questions, we need to adopt a perspective that is both broader and deeper than that commonly on offer—to see the big changes in the landscape of American politics that are too often missed or taken for granted, to look inside the black box of government policies that are too often treated as immaterial or uninteresting (but which turn out to be neither). We need to travel down neglected byways of American political and economic life that lead to the heart of the winner-take-all economy, to find the forgotten stories that help us see the profound changes in American democracy that have unfolded in our time. Along the way, we will meet sometimes-little-known figures who helped engineer hidden but profound organizational changes—in American politics and, through those political shifts, in the American economy.
Winner-Take-All Politics is not another of the many book-length indictments of our nation’s present economic wrongs, with their familiar finger-pointing at the greed or incompetence of public or private figures. Our current crisis certainly bears emphasis, in part because it so clearly reveals the sources and costs of the winner-take-all economy. And by the end of our investigation, the roots and realities of contemporary discontents will indeed be apparent. But, as will become clear, our current crisis is merely the latest in a long struggle rooted in the interplay of American democracy and American capitalism. This struggle has not unfolded overnight. Nor is it a simple linear tale of sweeping, inevitable change. The advancing tide of the winner-take-all economy sometimes feels like a force of nature. (Certainly, it is convenient for its beneficiaries to describe it that way.) Yet America’s slow, steady slide toward economic oligarchy has been neither beyond human control nor bereft of resistance.
We tell the story of a thirty-year war. Marked by bitter conflict, it has involved more than flash-in-the-pan personalities or fleeting electoral victories. Step by step and debate by debate, America’s public officials have rewritten the rules of American politics and the American economy in ways that have benefited the few at the expense of the many. Not all have been as candid about what they were doing as former Democratic Senator John Breaux when he joked that his vote could not be bought but could be “rented” by the highest bidder. Nor have many been as rhapsodic as Republican Senator Phil Gramm, who described Wall Street as a “holy place.” But, for reasons we shall explain and with consequences we will unveil, all of America’s political class have felt the increasing pull of the winner-take-all economy.
Our story unfolds in three parts. Part 1 delves into the mystery of the winner-take-all economy. We come face-to-face with what has really happened in the American marketplace over the last generation: who’s won and who’s lost in the thirty-year war, and how government has played an integral role in creating these new economic realities. Here, we crunch the economic numbers—the right numbers, the numbers that truly get to the heart of what has happened to our economy over the last generation. But we also take our investigation where the right numbers lead and, in doing so, enter surprisingly uncharted territory. To uncover the path to winner-take-all requires seeing the transformation of American government over the last generation, a transformation that has fundamentally changed what government does, and whom it does it for.
But resolving our first mystery only reveals a deeper one: If government has played a central part, how could this happen? In a country where public officials must regularly face the judgment of citizens at the polls, how could their efforts come to so persistently favor the very few? In our search for clues, we show that this is an age-old question, and that the thirty-year war has parallels in our nation’s past—in the great debates over government’s place in a dynamic, increasingly unequal economy that took place in the first half of the last century.
Part 2 takes us down to the subterranean roots of the winner-take-all economy, which lie, against common expectations, in the political transformations of the 1970s. The seventies are the forgotten decade of American political history. Received wisdom seeks the wellsprings of our polarized and confrontational politics in the cultural clashes and electoral upheavals of the 1960s. Casting liberal movements against conservative political reactions, this familiar storyline misses the true timing and character of the shifts that have generated our deeper crisis—and overlooks some of the central political movements that reshaped the battlefield of combat.
In part 3, we provide a portrait of the new world of American politics forged in this crucible—the world of “Winner-Take-All Politics.” We do so through the prism of the nation’s two political parties, showing how Republicans and Democrats have both responded, in different ways, to the political pull of America’s superrich. Here we see the full causes and consequences of the political transformations of the era. Here we also see the daunting challenges that President Obama has had to grapple with in the latest and most epic battle in the thirty-year war.
We would have liked to end our book by declaring the end of winner-take-all politics. But the effects of a thirty-year war are not wiped away overnight. The hurdles to renewal, rooted in the story we tell, are formidable. Yet, as high as they are, they do not lead us to counsel despair. For the obstacles are not irresistible forces of nature but man-made forces of politics. And they are obstacles that our nation has faced before. The gap between the ideals of American democracy and the realities of American politics has yawned in the past. Reformers have dramatically narrowed this gap in the past as well. Nothing in this history suggests today’s barriers will be easily cleared. But there is much to instill determination that they can and must be.