DIG UNDER THE SURFACE of the system and you see individuals making deals that generated billions for themselves—such as Carl Icahn’s corporate raids, Jack Welch’s attacks on GE’s workers and unions, Warren Buffet’s investments in corporations with moats, and Sandy Weill’s and Jamie Dimon’s unfettered financial supermarkets and betting parlors.
Dig deeper and you see how these deals depended on seemingly small changes in laws and regulations, such as preventing companies from defending themselves from raiders, neutering antitrust enforcement, imposing small fines on corporations for firing union organizers, refusing to regulate derivatives, and dismantling Glass-Steagall.
Bore still deeper and you see a vicious cycle in which, starting around 1980, wealth and power began concentrating among a relatively small group at the top, giving them increasing political clout to get changes in laws and regulations that concentrated their wealth and power even more.
Look at the shifting tectonic plates under all this and you view the profound shifts in the allocation of power that brought us the system we have today. The first three decades after World War II featured a growing middle class, a steadily more inclusive democracy, and a nation beginning to grapple with problems like poverty, inequality of opportunity, and environmental decay. African Americans and women slowly gained footholds in the system. Mass production begat mass consumption, and mass consumption demanded steady jobs with good wages. This balance relied on strong unions, a government willing to regulate corporations, and large corporations rooted in their communities and responsible for the well-being of their employees and neighbors as well as shareholders.
In the last forty years, the opposite has occurred: The middle class has shrunk, democracy is too often malfunctioning, and the nation has turned its back on climate change, poverty, widening inequality, and the evils of racism and xenophobia. As I’ve said, the economy doesn’t have to be a zero-sum game in which winners do better only to the extent losers do worse. But power is necessarily a zero-sum game. Certain people possess it only to the extent other people don’t. Some people gain it only when others lose it. The connection between the economy and power is critical. As power has concentrated in the hands of a few, those few have grabbed nearly all the economic gains for themselves.
The oligarchy has triumphed not because Carl Icahn, Jack Welch, Warren Buffett, Sandy Weill, Alan Greenspan, Robert Rubin, Jamie Dimon, or anyone else conspired to make it happen. I doubt any of them thought about the system as a whole. They triumphed because no one paid attention to the system as a whole—to the consequences of the shifts from stakeholder to shareholder capitalism, from large unions to giant corporations, and from regulated to unfettered finance. The choices that the American public assumed were at stake—the so-called political right versus left, Republican versus Democrat, free market versus government, efficiency or inefficiency, national competitiveness or lack thereof, corporate responsibility or irresponsibility, socialism or capitalism—distracted us from the more fundamental questions about power: Who was gaining it? Who was losing it? Were we satisfied with the results? Through it all, Americans have clung to the meritocratic tautology that individuals are paid what they’re worth in the market, without examining changes in the legal and political institutions that define the market. This tautology is easily confused with a moral claim that people deserve what they are paid. Yet this claim is meaningful only if the system’s legal and political institutions are morally just. It has lured us into thinking nothing can or should be done to alter what people are paid because the market has decreed it. By this logic, the oligarchy is natural and inevitable.
Wealth is not like income. Income is payment for work. Wealth keeps growing automatically and exponentially because it is parked in investments whose value compounds over time. Because of this, today’s concentration of wealth could come to resemble the kind of dynasties common to European aristocracies in the seventeenth and eighteenth centuries. We’re already at a point where many of today’s super-rich have never done a day’s work in their lives. Six out of the ten wealthiest Americans alive today are heirs to prominent fortunes.
The three wealthiest families in America today are the Waltons of Walmart, the Mars candy family, and the Koch family, heirs to the energy conglomerate Koch Industries. Since 1982, the combined wealth of these three families has grown nearly 6,000 percent, adjusted for inflation. Over the same period, the typical household’s wealth dropped 3 percent. The Walmart heirs alone have more wealth than the bottom 42 percent of Americans combined. Today, the Walmart family fortune grows by $70,000 per minute, $4 million per hour, $100 million per day.
Rich millennials will soon acquire even more. America is on the cusp of the largest intergenerational transfer of wealth in history. As wealthy boomers expire over the next three decades, an estimated $30 trillion will go to their children. Those children will be able to live off of the income these assets generate, and then leave the bulk of the assets—which in the intervening years will have grown more valuable—to their own heirs, tax-free. After a few generations of this, almost all of the nation’s wealth will be in the hands of a few thousand families.
Dynastic wealth runs counter to the ideal of America as a meritocracy. It makes a mockery of the notions that people earn what they’re worth in the market and that economic gains should go to those who deserve them. It puts economic power into the hands of a relatively small number of people who have never worked but whose investment decisions have a significant effect on the nation’s future. It creates a self-perpetuating aristocracy that is antithetical to democracy. Dynastic wealth also magnifies race and gender disparities. Because of racism and sexism, women and people of color not only earn less, they have saved far less—which is why the racial wealth gap and gender wealth gap are huge and growing.
As I have noted, the last time America faced anything comparable to the current concentration of wealth was at the turn of the twentieth century. Then, President Theodore Roosevelt warned that “a small class of enormously wealthy and economically powerful men, whose chief object is to hold and increase their power” could destroy American democracy. Roosevelt’s answer was to tax wealth. The estate tax was enacted in 1916 and the capital gains tax in 1922. Since that time, both have been eroded. As the rich have accumulated greater wealth, they have also amassed more political power, and they’ve used that political power to reduce their taxes.
Even as the American middle class shrinks, America now has more billionaires than at any time in its history. There are basically only four ways to accumulate a billion dollars, and none of them is a product of so-called free market. They all depend on how the system has become organized.
One way to make a billion is to exploit a monopoly. Jeff Bezos is worth $110 billion. You might say he deserves it because he founded and built Amazon. But, as I have pointed out, Amazon is a monopoly with nearly 50 percent of all e-commerce retail sales in America (and e-commerce is gaining the lion’s share of all retail sales). Consumers have few alternatives. Nor do many suppliers who sell through Amazon; for the first twenty-five years of its existence, Amazon wouldn’t let them sell at a lower price anywhere else. Amazon’s business is protected by patents granted to Amazon by the U.S. government and enforced by government. If we had tough antimonopoly laws, and if government didn’t grant Amazon so many patents and extend them for such a long time, Bezos would be worth far less. The same applies to people like George Lucas, Oprah Winfrey, or any other figure whose brands, ideas, or creations depend on patents, copyrights, and trademarks—intellectual property laws that have been dramatically extended in recent decades. If these were shortened, these people would be worth far less, too.
A second way to make a billion is to get insider information unavailable to other investors. The hedge-fund maven Steven A. Cohen is worth an estimated $12.8 billion. According to a criminal complaint filed by the Justice Department, insider trading at Cohen’s SAC Capital was “substantial, pervasive, and on a scale without known precedent in the hedge fund industry.” Eight of Cohen’s present or former employees pleaded guilty or were convicted for using insider information. Cohen got off with a fine, changed the name of the firm, and apparently is back in the game.
A third way to make a billion is to pay off politicians. The Trump tax cut was estimated to save Charles and David Koch—each of whose net worth was estimated to be about $50 billion—and their Koch Industries $1 billion to $4 billion a year, not even counting tax savings on offshore profits and a shrunken estate tax. The Kochs and their affiliated groups spent an estimated $20 million lobbying for the Trump tax cut, including major donations to politicians. Not a bad return on investment: More than a billion dollars a year back for only $20 million put in. Koch Industries has also been a major beneficiary of government programs to fill the Strategic Petroleum Reserve, provide roads and access to virgin growth forests, use eminent domain to build pipelines, and profit off federal lands.
A fourth way to be a billionaire is to get the money from rich parents or relatives. As I’ve noted, about 60 percent of all the household wealth in America today is inherited. That’s because, under U.S. tax law—which is itself largely a product of lobbying by the wealthy—the capital gains of one generation are wiped out when those assets are transferred to the next, and the estate tax is so tiny that only 0.2 percent of estates were subject to it in 2017. America is creating a new aristocracy of people who have never worked a day in their lives.
We could abolish billionaires by changing the way the system is organized. This doesn’t mean confiscating the wealth and assets of the super-rich. It does mean getting rid of monopolies, stopping the use of insider information, preventing the rich from buying off politicians, and making it harder for the super-rich to avoid paying taxes—in other words, creating a system in which economic gains are shared more widely. Entrepreneurs like Jeff Bezos would be just as motivated to come up with dazzling innovations if he received $100 million, or even $50 million. But the current cost to our democracy of billionaires with enough wealth and power to change the system for their own benefit is incalculable.
The standard explanation for widening inequality is that globalization and technological change have made most Americans less competitive because the tasks we used to do can now be done more cheaply by lower-paid workers abroad or by computer-driven machines. According to this view, wages for most have stagnated because workers are worth less than they were before new technologies and globalization made many of their old jobs redundant. American workers therefore have to settle for lower wages and less security. If they want better jobs, they need more education and better skills. So hath the market decreed.
This is rubbish. No other developed nation has nearly the degree of inequality found in the United States, even though all have been exposed to the same forces of globalization and technological change. Nor can this standard explanation account for why the compensation of top corporate executives has soared from an average of 20 times that of the typical worker fifty years ago to more than 300 times today, or why the denizens of Wall Street, who in the 1950s and 1960s earned comparatively modest sums, are now paid tens of millions of dollars annually. They are hardly worth that much more now than they were worth then. American incomes and wealth have uniquely diverged over the last forty years because of the changes in the American system I have outlined. Large corporations and Wall Street have possessed the wealth and power to change the rules of the game to increase their share of the pie while reducing the share going to most Americans. CEOs have done everything possible to prevent the wages of most workers from rising in tandem with productivity gains, so that more of the gains go instead toward corporate profits, and from there mainly into the pockets of top executives, major investors, and shareholders.
Workers worried about keeping their jobs have been forced to accept this transformation without fully understanding its political roots. Public policies that emerged during the New Deal and World War II had placed most economic risks squarely on large corporations through strong unions, antitrust enforcement, and laws compensating workers for injuries, providing forty-hour workweeks with time-and-a-half for overtime, unemployment insurance, Social Security, and employer-provided health benefits (wartime price controls encouraged such tax-free benefits as substitutes for wage increases). But in the wake of the junk-bond and takeover mania of the 1980s, economic risks were shifted to workers. Corporate executives did whatever they could to reduce payrolls—outsource abroad, bust unions, install labor-replacing technologies, and utilize part-time and contract workers. New laws and regulations smoothed this transformation. Safety nets were shredded. Monopolies grew. Many labor protections disappeared. Wall Street took over.
As a result, economic insecurity has become baked into employment. Full-time workers who put in decades with a company can now find themselves without a job overnight—with no severance pay, no help finding another job, and no health insurance. Even before the crash of 2008, the Panel Study of Income Dynamics at the University of Michigan found that over any given two-year stretch in the two preceding decades, about half of all families experienced some decline in income. Today, nearly one out of every five working Americans is in a part-time job. Many are consultants, freelancers, and independent contractors. Eighty percent of Americans are living paycheck to paycheck. Employment benefits have shriveled. The portion of workers with any pension connected to their job has fallen from just over half in 1979 to under 35 percent today.
Fifty years ago, when General Motors was the largest employer in America, the typical GM worker earned $40 an hour in today’s dollars. Now, America’s largest employer is Walmart, and the typical entry-level Walmart worker earns $11 an hour. This isn’t because the typical GM employee a half century ago was worth four times what the typical Walmart employee is now worth. The GM worker wasn’t better educated or better motivated than today’s Walmart worker. The real difference is GM workers a half century ago had a strong union with enough bargaining power to get a substantial share of company profits for its members. Because more than a third of workers across America belonged to a labor union, the bargains those unions struck with employers raised the wages and benefits of non-unionized workers as well. Non-union firms knew they would be unionized if they did not come close to matching the union contracts.
Today’s 1.5 million Walmart workers don’t have a union to negotiate a better deal for them. Because only 6.4 percent of today’s private-sector workers are unionized, most employers do not have to match union contracts—which puts unionized firms at a competitive disadvantage. As I’ve noted, public policies have enabled and encouraged this systemic change. More states have adopted so-called right-to-work laws. The National Labor Relations Board, understaffed and overburdened, has barely enforced collective bargaining. The result has been a race to the bottom. Given these changes in the system, it’s not surprising that corporate profits have increased as a portion of the total economy while wages have declined. Those whose income derives directly or indirectly from profits—corporate executives, Wall Street traders, and shareholders—have done exceedingly well. Those dependent on wages have not.
The underlying problem is not that most Americans are worth less than they had been or that they have been living beyond their means. Nor is it that they lack enough education to be sufficiently productive. The basic problem is the system itself has become tilted ever more in the direction of moneyed interests that have exerted disproportionate influence over it, while average workers have steadily lost bargaining leverage—both economic and political—to receive as large a portion of the economy’s gains as they commanded in the first three decades after World War II. As a result, their means have not kept up with what the economy could otherwise provide them. To attribute this to the impersonal workings of the free market is to disregard the power of large corporations and the financial sector, which have received a steadily larger share of economic gains as a result of that power. As their gains have continued to accumulate, so has their power to accumulate even more.
The answer to this conundrum is not found in economics. It is found in politics, and it is rooted in power. The systemic changes have been reinforcing and cumulative. As more of the nation’s income flows to large corporations and Wall Street and to those whose earnings and wealth derive directly from them, their political influence over the rules of the market increases, which in turn enlarges their share of total income. The more dependent politicians become on these financial favors, the greater their willingness to reorganize the system to the benefit of these moneyed interests. The weaker unions and other traditional sources of countervailing power become, the smaller their political influence over the system, which causes the playing field to tilt even further against average workers and the poor.
Ultimately, these trends in America, as elsewhere, can be reversed only if the vast majority, whose incomes have stagnated and whose wealth has failed to increase, join together to demand fundamental change. The most important political competition over the next decades will not be between the right and left or between Republicans and Democrats. It will be between a majority of Americans who have been losing ground and an economic elite that refuses to recognize or respond to the majority’s growing distress.