Figure 3 shows how the top 1 percent of the population became very rich in the past thirty years. This chapter integrates this growing share of national income into a discussion of politics in a dual economy. The Investment Theory of Politics is the connection between the income distribution in the United States and political decisions. A comparison of the percentages of the population represented in the various groups and sectors that have been described so far will help us understand the role of various groups in the dual economy. Table 1 contains the relevant data. The first and third rows contain observed information; the other rows show calculated percentages of the total population.
Table 1 U.S. population and its parts
| Category | Population |
| Total U.S. population | 320,000,000 |
| FTE sector (20%) | 64,000,000 |
| Black population | 46,000,000 |
| 1% of the total population | 3,200,000 |
| 1% of the 1% | 32,000 |
| 1% of the 1% of the 1% | 320 |
Source: https://www.census.gov/topics/population/data.html for the first and third rows.
The United States has 320 million people in it at this time. The top 20 percent of them make up the FTE sector in our dual economy. Doing the multiplication shows there are about 64 million people in the FTE sector, as shown in the second row of table 1. This is only slightly larger than the number of blacks in our economy, shown in the third row of table 1. There is overlap in these two groups, as black managers and professionals are in the FTE sector, but they are largely distinct.
Below those rows are various proportions of the total population. The fourth row shows the top 1 percent of the population, whose increasing share of total income is graphed in figure 3. The next row shows the top 1 percent of the top 1 percent of the population, which we should think of as leading financial and business managers. There are roughly thirty thousand people in this category. The final row shows the top 1 percent of the top 1 percent of the top 1 percent of the population. They are members of the Forbes 400, a list published annually of the richest people in America.1
They also are the people who have tried for many years to transform their ideas about the role of government into public policy. The 1971 Powell Memorandum was a call to arms to business leaders that began a complex dance between these groups of rich people that can be clarified by describing the politics of people in the last three rows of table 1 in turn. The Investment Theory of Politics asserts that people invest in policies that benefit them. This survey supports that argument.
It is of course hard to find information about the rich. They are busy and private; they set up gatekeepers to fend off social scientists who want to study them. The “1 percent” is the most numerous group of the very rich, and a sample of this group would be useful. Page, Bartels, and Seawright with great effort gathered such a sample in 2011. They started with a list of rich people that had been collected for high-end businesses to reach their desired customers. They refined this list by selecting those people with expensive houses and income-producing assets and then selecting again those who also appeared in a list of high-level executives. They tried to interview people on the resulting list, ending up with a sample of just over eighty rich people.
The average income of the respondents was about a million dollars; their average wealth was about fourteen million dollars. The mean was considerably higher than the median, indicating that the sample contained some considerably richer individuals. The sample reported constant political activity, including personal contacts with government officials. When asked what the most important problem was facing the United States, almost all of them said budget deficits.
The one-percenters said that unemployment and education were important issues, but these problems seldom were listed as the most important issue facing America. Less wealthy people also are worried about government deficits, but the one-percenters differ by favoring spending cuts rather than tax increases to eliminate the deficits. They generally favor government spending for infrastructure and scientific research, but not any of the social welfare programs of the government like Social Security and food stamps. Page, Bartels, and Seawright say, “We speculate that the striking contrast concerning core social welfare programs between our wealthy respondents and the general public may reveal something important about the current state of American politics.”2
Even though the respondents said they were concerned about unemployment, they rejected federal programs to help the unemployed find jobs. This view contrasts sharply with that of the general public, which widely supports job help. There was a similar difference of opinion about the minimum wage and the Earned Income Tax Credit, which help low-wage workers. The one-percenters were far more negative about them than the general public. Similarly, the one-percenters were far less likely to approve of government spending to ensure that all children have good schools if taxes are needed for this purpose. And they also were less willing to pay more taxes to provide universal health coverage.
The one-percenters favor private spending to improve education. They also want to reduce regulation. The sample of rich people was not constructed to show difference within the sample, but wealthier individuals were significantly more likely to want reduced regulation than the poorer members of the one percent. This study provides a window into the attitudes and preferences of the one-percent group, which wants to reduce government activities in order to reduce government deficits. They do not want their taxes raised to lower government deficits, and they favor tax cuts when they can get them.3
The one-percenters were introduced by Chrystia Freeland as follows in Plutocrats: “They are becoming a trans global community of peers who have more in common with one another than with their countrymen back home.” And she concluded with the comment of a businessman: “the per capita consumption of the Western middle class would have to decline as the developed and developing worlds ‘meet somewhere in the middle.’”4
Moving upward in the income distribution—and downward in table 7.1—the 1 percent of the 1 percent are more intensely focused on lower taxes than the 1 percent group as a whole. They also are more politically active than the 1 percent group as a whole. They provided over one quarter of all political contributions in the 2012 election. Every U.S. representative and senator elected in that year received financial support from the 1 percent of the 1 percent. And over four-fifths of these elected officials received more money from this select rich group than from all of the donors who gave $200 or less.
The political contributions of the very rich went to both parties. It is comforting to think of differences between the two major parties, but they draw support from the same narrow band of the income distribution. Nancy Pelosi and John Boehner, successive Democratic and Republican former Speakers of the House of Representatives, were among the representatives whose support from the 1 percent of the 1 percent was the strongest. The Investment Theory of Politics implies that their policy stances are not that different. They belong to different parties and differ on many specific policies. But they are both attentive to the FTE sector and are not eager to rock the boats of the very rich.5
The Investment Theory also asks what industries are behind this political support. The industry sector by far most frequently behind these gifts is what economists call the FIRE sector: finance, insurance, and real estate. This simple observation clarifies one of the important political decisions of the last decade. After the financial crisis of 2008, the financial institutions that were hurt in the crash were bailed out, but the householders whose mortgages went bad were not. As will be described in chapter 12, this failure to bail out members of the low-wage sector retarded the nation’s recovery from the financial crisis. The Investment Theory of Politics leads us to important questions about the political process and indicates how the FTE sector ignores the needs of the low-wage sector.
A good summary of the policy desires of the 1 percent of the 1 percent is that they want to undo the New Deal. Roosevelt faced forceful opposition from business in the 1930s as he tried to alleviate the effects of the Great Depression. That opposition continued after the Second World War and was combined with the Southern interest in maintaining segregation by Senator Jesse Helms from North Carolina and others. Helms opposed the welfare state and labor unions as well as integration. He argued that it was better to close down public schools than to integrate them. And he considered it important to group all these policy decisions together as an opposition to socialism, keeping his opposition to integration in the background.6
The epicenter of this conservative business movement was Dallas, Texas. Dallas was an oil town, and it was given a great boost in the Second World War as the federal government relocated war production away from the coasts. Dallas became the “War Capital of the Southwest.” Oil producers linked their conservative ideas to Ayn Rand and Friedrich Hayek after the war. They anchored their ideology in American history by arguing that the U.S. Constitution was not designed to protect rights, but instead to restrict them. In their view, the Constitution’s role was to protect property rights, safeguard states’ power from the federal government, and curtail democracy to preserve privilege.7
This view of a limited federal government appears to be at variance with the support that oil production and the owners of oil companies have continued to get from the federal government. Congress approved an oil depletion allowance in 1926, allowing oil producers to deduct more than a quarter of their gross revenues from their taxable income. The Texas senator who sponsored this tax break admitted later that oil producers would have been happy with a lower depletion allowance, but they thought that the figure of 27.5 percent gave the allowance the appearance of scientific reasoning. And of course they were happier with the bigger deduction. Roosevelt wanted to close this tax loophole in the 1930s, but nothing was done. Truman tried as well and similarly failed. Kennedy and Nixon debated the depletion allowance. Kennedy opposed it, and Nixon supported it in keeping with his Southern Strategy. The oil depletion allowance was altered and sometimes restricted in various ways since then, but when Obama tried to repeal it in 2007, his bill died in the Senate Finance Committee, which was under Democratic control.8
The belief in small government does not conflict with the readiness of business leaders to profit from the effects of government. The way to understand this apparent contradiction is that “small government” does not have a simple meaning. It means partly a government that does not try to help the low-wage sector of the economy. The New Deal should be repealed; extensions in the postwar years should be eliminated as well. Unions should be broken. But transfers through the tax system from the low-wage sector to the FTE sector are fine.
The Constitution empowered Congress to extend bankruptcy policies to promote business. Business operations regularly use this provision today to shift their expenses to the low-wage sector. Coal companies despoiled the countryside in Appalachia, and regulators estimate that it will cost a billion dollars to clean up after them. The coal companies, however, are going bankrupt, and the cost will fall on the low-wage sector. Donald Trump similarly used bankruptcy to make others pay for his speculative activity in Atlantic City while walking away with profits.9
Trump took advantage of tax loopholes that apply to real estate to the tune of about a billion dollars; likewise New Jersey suffered a loss when David Tepper, a hedge-fund billionaire, moved to Florida to be subject to lower taxes. Many companies also dodge taxes by moving their profits around. Apple, the most profitable American company, holds its profits abroad to avoid taxes. Pfizer, a leader of the profitable pharmaceutical industry, sought a tax inversion that would shift its corporate tax burden abroad where corporate tax rates are lower. States compete among themselves for rich residents by shielding their wealth.10
And although they work hard to reduce their taxes, the 1 percent of the 1 percent also do not hesitate to avoid taxes altogether if they can. Gabriel Zucman estimated that 8 percent of household financial wealth was in tax havens in 2014. This is almost eight trillion dollars, which is a lot of money to be hidden away from tax collectors. The exposure of a Panama bank that arranged for money to be hidden—a controversy that has come to be called the Panama Papers—has revealed some of the details of how all this tax reduction takes place. And the effective tax on U.S. businesses is falling fast as profit is hidden in tax havens. The hidden wealth of American corporations has lowered the effective corporate profit rate to half its nominal rate.11
Turning to the last row of table 7.1, the 1 percent of the 1 percent of the 1 percent of the population consists of about three hundred people. They are three-quarters of the Forbes list of the 400 wealthiest people in the United States. Their names are clear, and their political activities are legion. Just as their wealth is extreme, their politics are extreme. They agree with the lower members of the financial hierarchy that their taxes should be low and government activities reduced. They believe this very strongly and have become politically active to achieve their ends.
There are almost no African Americans in the Forbes 400. There are a very few who have made enough money to be in this list of unbelievably wealthy individuals. Extraordinary people of African descent have made it to the top of this field as they have made it to the top of other fields. W. Arthur Lewis, who formulated the model used here, was a top economist; President Obama is a top politician. But racecraft has kept the number of African Americans in the Forbes 400 far below the fifty or so black faces we would see if American society and economy were completely integrated.
When African Americans get elected to public office, they face daunting challenges. They typically want to correct some of the ills that have befallen minorities in the United States, but they cannot be seen as being too obviously in favor of the disadvantaged to remain in office. President Obama seemed, as the first African-American president, to be uniquely in this position, but other African Americans who have been mayors, governors, and senators have faced similar conflicts of interest. And of course, they have all experienced disappointments as whatever they were able to do was limited in the face of the forces of racecraft.12
Unlike the 1 percent as a whole who give money and talk to government officials, some members of the Forbes 400 formed a secret organization in the 1970s to promote their ends. Charles Koch, who with his brother, David, is in fifth place in the 2015 Forbes 400, was energized by Powell’s secret memo of 1971. He started ALEC, the American Legislative Exchange Council, in 1973. This state lobbying organization operates under the radar of most people interested in national politics because even interested observers cannot keep all states in view. But, as explained in chapter 2, ALEC is most successful when state legislators lack resources of their own to investigate proposed laws. States are increasingly strapped for money given that Nixon’s New Federalism as implemented by Reagan and succeeding administrations deprives state government of resources. The combination of policies leads to increasing effectiveness of ALEC.
Koch also formed a secret organization to advance the interests of large businesses and rich executives by following the model of the John Birch Society—a conservative, small-government and anti-communist organization founded around 1960—on a vastly expanded scale. Although this organization was designed to bring down much of our government, its aim was not to be called anarchism in order to avoid association with terrorists. As Charles wrote in 1976, “In order to avoid undesirable criticism, how the organization is controlled and directed should not be widely advertised.” This dissembling echoes Jesse Helms’s indirection.13
We know about this secret organization primarily from Jane Mayer’s book, Dark Money. This remarkable book sheds light on the dark Koch enterprise, which she calls the “Kochtopus.” Mayer wrote a New Yorker article on the Koch brothers in 2010 as she began her publications on political dark money. The Koch brothers responded by hiring a private detective to dig up dirt on Mayer. They wanted to accuse her of plagiarism, one of the most damaging practices of irresponsible reporters. They tried to kill the messenger and preserve the secrecy of their organization. Mayer is a responsible journalist, and the Koch brothers did not succeed in shutting her up. Much of the following detail comes from her book.14
Koch Industries is not in Dallas, but its primary business is refining oil. It owned the Pine Bend Refinery in Minnesota, which refined low-grade oil from Canada to sell widely in Minnesota and Wisconsin. It was profitable to refine this poor oil into good gasoline, but the refinery used massive amounts of energy and polluted its environs. Koch Industries management did not warn employees about the dangers of working there and was resistant to both internal whistle blowers and external government challenges, particularly from the Environmental Protection Agency. As Charles Koch wrote in the Libertarian Review in 1978, “We should not cave in the moment a regulator sets foot on our doorstep. ... Do not cooperate voluntarily; instead, resist wherever and to whatever extent you legally can. And do so in the name of justice.”15
Like the Dallas oil producers, Koch aspired to shift the costs of production to the low-wage economy. The mechanism, however, was different. While the Dallas crowd was happy with a subsidy in the form of the oil depletion allowance, Koch imposed costs directly on his employees and the people around his refinery who were affected by the pollution it generated. His opposition to government regulation was both ideological and profitable. Koch Industries was accused in a Senate investigation in 1989 of stealing from Native Americans, a minority population at the opposite end of the income distribution. The investigation of this theft led to lawsuits and a large judgment against Koch in 1999. The company also was listed as one of the top ten air polluters in the United States in 2010.16
Early in 2010, the Supreme Court decided the landmark case Citizens United, ruling that the government could not restrict independent political expenditures by nonprofit companies, greatly easing the flow of campaign contributions from companies. Koch and his secret organization were quick to seize the opportunity. Reasoning that their money would have more impact in smaller markets, they poured money into state races for governors and representatives in the 2010 midterm elections. Democrats were slow to take advantage of this opportunity. They were neither disciplined nor under centralized control; even if they had realized the opportunity, they would not have agreed on how to allocate their resources. And of course they had far fewer liquid resources at their disposal than the Kochtopus.
The Democrats lost control of Congress and many conservative governors were elected in 2010. President Obama and the Democratic Party did not know what hit them. They discussed ideas and tactics in retrospect, but they did not follow the path outlined in the Investment Theory of Politics that the money and industries supplying the money are the key actors in political competitions. And the secrecy of the Koch political organization, now augmented by the secrecy allowed by Citizens United, made it hard to find the source of political money.17
This story is only about the effects of one very rich family. There are other politically active people in the Forbes 400, but we can only give a few pointers to what be many relevant stories. The Kochtopus gets funds from rich people in financial industries. We do not know who they are because of the secrecy that surrounds this secret Koch organization, but the concentration of financial people interested in deregulating finance cannot be surprising. Looking only a little way down the list from the richest people in the country we find Sheldon Adelson, who is active in politics along the same lines as the Koch brothers.
Roughly equal in wealth at around $25 billion, George Soros expresses his views by funding quite different activities that range from promoting democracy in Eastern Europe to encouraging varied approaches to economics through the Institute for New Economic Thinking. While most rich people appear to be conservative to one degree or other, there is some variety among the very richest Americans. But the presence of a few highly visible philanthropists should not blind us to the conservative views of most of the top 1 percent and especially the very rich. The Investment Theory of Politics tells us how important these views are for the future of the United States.18