The Oligarchy in America Today

Alexis de Tocqueville began his classic description of democracy in America by remarking that what struck him most about the strange new country he visited in the early 1830s was “the general equality of condition among the people.” Much of the rest of what he wrote was an elaboration of what this equality meant, and why it mattered. Tocqueville saw, of course, that some Americans had more money, and enjoyed greater social status and political influence, than others. But “though there are rich men,” he explained, “the class of rich men does not exist; for these rich individuals have no feelings or purposes, no traditions or hopes, in common.”

Tocqueville also warned, however, of a force that threatened in time to undermine this democracy grounded on equality. The danger he saw was economic, arising from the increasingly hierarchical structure of business activity: eventually, he feared, “the master and the workman have then here no similarity, and…are connected only like the two rings at the extremities of a long chain…. What is this but aristocracy?” He concluded that “if ever a permanent inequality of conditions and aristocracy again penetrates into the world, it may be predicted that this is the gate by which they will enter.”

Many observers of America today think Tocqueville’s fears have become reality. The gap between “masters” and “workmen” has widened beyond anything he could have envisioned. And, in contrast to what Tocqueville observed in the still-new republic, today there certainly is a “class of rich men.” No one doubts that the children and grandchildren of today’s top hedge fund managers and Internet entrepreneurs will enjoy privileged positions for generations to come.

The problem is threefold. First, contrary to what most economists of the early post–World War II generation expected, inequality in the United States has now been widening for the past four decades.¹ Especially at the very top of the scale—not just the top 1 percent, but even more so the top 0.01 percent—the increases in income and wealth have been enormous. For most other Americans, incomes have been stagnant; with the decline in house prices, so has their wealth. In the recent setting of only modest overall economic growth, this widening inequality has meant that almost all of what economic gains have occurred accrued to those at the top. From 2000 until the financial crisis hit in 2007, total production in the United States expanded by 18 percent after allowing for inflation; the income of the family just at the middle of the nation’s income distribution rose by not even one half of one percent.

Second, the spectacular successes of a few entrepreneurs notwithstanding, it has become harder for Americans to move up (or down) the economic scale than it used to be. Measuring economic mobility is notoriously difficult, but the evidence increasingly suggests that movement along the economic spectrum, from one generation to the next within families, is now less common in the United States than in many other high-income countries, including Germany, France, Japan, and Canada.² Part of what underlies Americans’ traditional tolerance for greater inequality than in other countries is the belief that in this country anyone can get ahead, and those who do so mostly deserve to. Without that presumption, today’s ever-widening economic gaps seem much less palatable.

Third, American electoral politics is increasingly a matter of money. Campaign spending in this year’s election will far exceed even the record-breaking pace of four years ago. Election coverage on television and other mainline media now devotes as much attention to the candidates’ fund-raising success as to their policy positions and attendance at their rallies. In part the change is technological, centered on the importance, and the cost, of television advertising. But legal decisions have mattered too, especially the breakdown of campaign-financing laws and the Supreme Court’s Citizens United decision allowing unlimited (and often anonymous) contributions, including those from businesses, to political groups aligned with but supposedly independent of the candidates.

It is the mutually reinforcing combination of these three forces that makes Tocqueville’s long-ago prediction seem prescient. A “class of rich men” now exists. Its income and wealth are steadily growing, both absolutely and as a share of the nationwide totals, while the majority of American families are experiencing economic stagnation or decline. Unlike in the Gilded Age of the late nineteenth century, when economic inequality in the United States was also wide and widening, today entry even to the beleaguered middle class is increasingly difficult for those not born into it. And those at the top are increasingly able to use the political system to maintain the arrangements that support these patterns.

Leaving aside the Supreme Court’s role, much of the public discussion of these regrettable developments has focused on technological change and other impersonal market forces. Changing modes of production reward some workers’ skills and devalue others’. The entry of China and India into the world economy has greatly enlarged the relevant supply of labor with which Americans compete. So has immigration, both legal and other. Advances in electronic communications and improvements in overseas transportation have rendered a much broader array of goods and services subject to international competition. Television has altered how politicians campaign for office. The standard arguments are familiar.

Hedrick Smith, the Pulitzer Prize–winning former reporter for The New York Times and author of widely read books like The Power Game and The New Russians, has a different explanation. In Who Stole the American Dream? Smith usefully emphasizes that developments like inequality and immobility and paid-for political influence reinforce one another. “Wealth begets wealth,” he writes, “especially when reinforced through the influence of money in politics. Then the hyperconcentration of wealth aggravates the political cleavages in our society.” As a result, “America has evolved into a caste society, increasingly stratified in terms of wealth and income…. Increasingly, privilege sustains privilege; poverty begets poverty.”

But Smith sees these developments as the product not of impersonal forces like technology but of deliberate choice, springing from a historically new “mind-set,” as he calls it, almost a form of conspiracy, among those who have benefited. He begins his story with an account of a memorandum written in August 1971 by Lewis Powell, then practicing law in Virginia and soon to be nominated to the US Supreme Court. According to Smith,

Powell’s intention was to spark a full-scale political rebellion by America’s corporate leaders… to change the political and policy mainstream in Washington and to put the nation on a new track, a track more favorable to business. And he succeeded.

With Powell’s memo as the catalyst, other familiar actors—William F. Buckley Jr. and his National Review, Irving Kristol with The Public Interest, Milton Friedman and a phalanx of University of Chicago economists—helped create “a huge swing of the policy pendulum in favor of the corporate elite—at the expense of the middle class.” Soon business corporations set up lobbying offices in Washington: more than 2,400 of them by ten years later, compared to fewer than two hundred at the time Powell wrote. The largest firms also banded together in new organizations, most prominently the Business Roundtable. Smaller firms joined the National Federation of Independent Business, which grew from three hundred members when Powell wrote to over 600,000 at the end of the decade. Donors funded new conservative think tanks, also headquartered in Washington, like the Heritage Foundation and the Cato Institute. Political organizers, especially in the Republican Party, pushed the pro-business, anti-labor policy agenda.

The consequence, in Smith’s account, was a series of policy choices that systematically favored employers over workers, rich over poor, business over consumers. Tax rates, minimum wage rates, union organizing rules, financial deregulation, pension arrangements, safety net eligibility and funding, campaign financing laws—all became “strongly tilted in favor of the business, financial, and corporate elites.” In parallel, corporate executives adopted a new attitude toward their workforce, continually raising their own pay and benefits at the expense of their workers’ pay, benefits, and jobs (and, in many cases, at the expense of their shareholders too). In time these policy choices and business decisions

dismantled the political and economic infrastructures that underpinned the great era of middle-class prosperity in the 1950s, ’60s, and ’70s [and caused] the unraveling of the American Dream for the middle class.

In political terms, “we have moved from a broad populism to a narrow plutocracy.”

The argument is important. It not only represents a different account of how “we have become Two Americas…divided by power, money and ideology”; its emphasis on conscious choice, indeed collusion, by the few who have benefited represents a distinct alternative to the usual focus on technological change, globalization, and the like. It also opens up broader avenues for redress. Technological change is difficult to resist, and globalization nearly as much so, but reversing consciously made choices is a matter of changing one’s mind—or, more likely, changing whose mind matters for the choices to be made. With his alternative historical explanation in hand, Smith goes on to present his plan for “reclaiming the dream.”

The problem is that Smith doesn’t make his alternative explanation persuasive. He amply documents the widening inequality, reduced mobility, and increasing role of money in politics that have beset America in recent years, relying on not just the usual statistics but also vignettes involving both well-known figures and everyday citizens whom he has interviewed. Many of the book’s chapters on more specific phenomena—globalization, offshoring, deregulation, business cost-cutting, predatory mortgage lending, military “overstretch,” the change from traditional defined-benefit pensions to 401(k) plans, even the evolution from political bipartisanship when Dwight Eisenhower was president and Lyndon Johnson the Senate majority leader to today’s bitter gridlock (a story that he tells especially well)—are likewise informative and well presented. But they too mostly follow the lines of the now familiar debate on such matters rather than supporting the case for an underlying conspiracy, much less one specifically triggered by Lewis Powell’s memo.

Smith succeeds, I think, in showing that there has been “a fundamental shift in the collective attitudes of American CEOs.” Today firms cut jobs and squeeze their workers’ pay and benefits when times are tough, in order to meet the competition and stay in business; and they also do so when times are more flush, in order to boost profits; top executives’ pay goes up under either circumstance. It used not to be so. A generation ago firms took a more benevolent (critics would say paternalistic) view of their workers, and a good many executives exercised restraint in what they chose to pay themselves. Now both sets of decisions are mostly a matter of what the market will bear. But what’s missing in Who Stole the American Dream? is an account linking all this—together with lower top-bracket tax rates, tougher rules restricting unions, and other important government policy changes—to a coordinated plan consciously engineered by a group of willful individuals who stood to benefit.

What’s missing too, especially in many of the book’s vignettes about business, is some explicit consideration of counterfactual possibilities. Smith’s argument is that, in one case after another, executives could have made more generous and less self-serving choices instead of the ones they made. But this argument requires an analysis of what consequences would have ensued if those more worker-friendly choices had been made.

For example, Smith tells how CEO Al Dunlap (who proudly styled himself “Chainsaw Al”) slashed payrolls first at Scott Paper and then at Sunbeam. Smith also notes that both companies nonetheless faltered: Scott Paper was acquired by Kimberly-Clark, and Sunbeam went bankrupt. What would have happened at these companies if Dunlap had instead maintained their workforces? Would they have done better? Or simply failed sooner? (Moreover, Smith’s view that these and similar actions at many other companies were a way of systematically favoring shareholders over workers needs to confront the fact that, for American business as a whole, the past fifteen years have been a period of exceptionally poor returns on common stocks. His argument might be that if CEOs had made more worker-friendly choices, stock returns would have been even worse, but he doesn’t say.)

One plausible view is that the two movements in the US income distribution that Smith treats in tandem—the gargantuan increase in the pay of top executives and the stagnation for almost everybody else—have different explanations. At the top, the “U-turn in the ethos of US business leaders” that Smith describes may well have led executives to abandon the restraint of a generation ago and take for themselves whatever the market will bear. (And, importantly, the glaring weakness of corporate governance in the United States—especially the failure of boards of directors to exercise independent judgment and control—means that the “market” will bear a lot.) The stagnation for practically everyone else seems more likely a product of changing technology, globalization, and other such forces, as conventional analysis would suggest. But that’s an economist’s view, not what Smith argues.

The absence of an explicit counterfactual argument weakens some other, more specific aspects of the book’s analysis as well. For example, Smith highlights the shift, throughout much of American business, from traditional defined-benefit pension plans to 401(k) and other defined-contribution plans—a change that he rightly calls “a monumental transformation for the American middle class.” But just what was the transformation? What Smith emphasizes is that the money companies contributed toward the old-style defined-benefit pensions didn’t appear as a deduction from employees’ paychecks, while what employees now contribute to their 401(k) accounts does. Smith interprets this difference to mean that “there was a huge shift in costs from employers to employees.”

It’s possible that this was so. But it’s also possible that under the old-style plans firms viewed what they put into their pension funds as part of their cost of payroll and accordingly paid workers less, so that in effect the employees were really paying all along. (By the same argument, most economists think that over the long run employees end up paying both the part of the Social Security payroll tax that comes out of their paychecks and the employers’ contribution.) If so, then what really matters about the move to 401(k) plans is the shift of risk from firms to their workers, not so much a shift in costs.

There is certainly room to argue the point, and presumably the truth lies somewhere in the middle: wages are lower when firms contribute to pension plans, but probably not dollar for dollar. But the force of Smith’s argument here depends on just where in the middle the truth is, and he offers no discussion of the matter. The same point, with analogous logic, applies to his discussion of the newer move from employer-provided to worker-bought health insurance.

Smith’s case is clearer when it comes to choices in our public policy. No one denies the rightward shift in American economic policy over the last four decades; conservatives hail the “Reagan revolution,” while liberals decry it. Most people understand that, in a political system like ours, changes in policy take place because someone campaigns for them, either publicly or directly with current and would-be officeholders. Most people understand too that much of that campaigning, again both the public part and what we don’t see, costs money that has to come from somewhere. The rightward shift that Smith documents fits squarely within the mold of prior political movements throughout America’s history as an independent republic.

Smith proposes to counter this shift with a new political movement—“a mass movement at the grass roots,” he says, that will amount to “a new populist rebellion.” Who Stole the American Dream? concludes with a ten-point plan to “put a middle-class agenda into law.”

The first eight points, revolving around various aspects of economic policy—rebuilding the nation’s infrastructure (both for the sake of the infrastructure to be built and even more so for the jobs that building it will create), tax credits and other devices to encourage research and manufacturing, middle-class-oriented tax reform, reduced defense spending, and the like—are mostly standard center-left Democratic Party talking points. One can question how effectively the United States can “push China to live up to fair trade,” or whether the tools at our government’s disposal can do much to spur innovation by business. In light of all the jobs that the Pentagon budget creates, not just in the uniformed services and on the Defense Department’s civilian payroll but at weapons manufacturers and military contractors of all varieties, it is also not obvious that a large reduction in defense spending would benefit middle-class incomes and employment. But for the most part the ideas Smith recommends are straightforward and familiar.

The novelty in his agenda—and the part of it that makes important his account of America’s widening inequality as the outcome of a conscious strategy—lies in his final two points: political reforms designed to “rebuild the political center” (for example, open primaries, online voter registration, computerized voting), and a “rebirth of citizen activism” involving “direct political action by millions of ordinary Americans.” Recalling the civil rights movement of the 1960s, and before that the veterans’ bonus marchers of the 1930s, Smith wants his fellow citizens to “show up at town meetings with members of Congress; get out on Main Street and demonstrate for jobs and homes; head for the state capital; take the bus or train to a march on Washington.” His goal is for “average Americans” to

stage rallies and protest marches and put up tent cities on the Washington Mall that make it impossible for Congress and the White House to ignore the needs and demands of ordinary people.

This call to arms raises two questions. First, as Smith acknowledges, America already has what looks something like the kind of political movement for which he’s calling: the Tea Party. It’s of course not what Smith has in mind. “The Tea Party looked like a populist movement,” he writes, “but when its profile emerged, it was not a movement of average Americans.” Smith cites surveys showing that Tea Party members are “predominantly white, male, older, more college-educated, and better off economically than typical Americans” (so far they sound like, say, readers of The New York Review of Books), and that politically they are “far to the right of average Americans.”³ And their agenda is very different from his: “to slash the size of government…without touching tax breaks for corporations and the wealthy.” Smith instead wants what he would consider a genuine populist movement, one that will push what he sees as a true middle-class agenda. Even so, the fact that there is today a growing mass political movement, and that it looks so different from the one Smith seeks, presents a challenge not just to his practical goal but to his analysis of what Americans want.

And second, at the practical level, apart from urging his fellow citizens to attend town meetings and erect tent cities, Smith does not say anything more concrete about who should do what to bring about this “modern political crusade by average Americans.” He is certainly entitled to feel that writing Who Stole the American Dream? is his contribution to that effort. But otherwise he simply assumes that the mere continuation of economic stagnation for the majority of Americans while the well-positioned few claim virtually all the fruits of what modest overall growth we achieve, together with the increasingly sorry spectacle of the dys- functional politics that keeps this process in place, will be sufficient to set off the “new populist rebellion” for which he calls.

For the past thirty years Americans have been told that if we cut tax rates for those at the top, cut benefits for those at the bottom, and eliminate regulation on business, in time we will all benefit. The promise has proved false, not to mention self-serving for many of those who have made it. Between 1980 and 2010, our median family income rose by only 14 percent; for this period as a whole, it fell if we leave aside 1993–2000, when a different approach prevailed. Smith clearly hopes that if “the slow, poisonous polarization and disintegration of our great democracy” continues, and we keep on “sliding into an economic and political oligarchy,” the public will be moved to change course. Evidence of such stirrings, alas, remains to be seen.