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  • Writer's pictureOren Levin-Waldman

The Political Economy of Inequality

In this space I have already established that rising inequality threatens democracy because of social strife that can result. We are already seeing that in increased polarization whose roots appear to lie in two distinct economies: a red state economy where inequality is relatively low and a blue state economy where it is relatively high. I have also established that it threatens the economy because the decline of the middle class means that there is less of a base for demanding goods and services and more research shows that inequality was indeed a cause of both the Great Depression in the 1930s and the Great Recession of 2008. In this column, I want to talk more about the political economy of inequality. The declining middle class means that a median voter who can choose a level of taxation and the size of government is no longer there. In the absence of the median voter, politicians no longer need to appeal to the middle. Rather, the mean income of society has skewed more to the top of the distribution. As more wealth is concentrated at the top, those with economic power find themselves enjoying even greater political power and are subsequently in a position to influence policy in ways that are favorable to their interests. This, of course, has only created a new feedback loop because the policies that serve their interests have only been contrary to those of ordinary workers who by no means have anywhere near the political influence the wealthy do. On the contrary, our Congress tends not to be at all responsive to the interests of those in the middle, let alone those at the bottom. To the extent that the government is more responsive to those at the top of the distribution, it effectively corrodes public trust, without which democracy cannot exist. First, let’s say something about the median voter theorem. In 1960, a group of political scientists, Angus Campbell, Phillip Converse, Warren Miller, and Donald Stokes, published a book on the median voter, titled The American Voter, where they postulated that those running for office, especially the presidency, would appeal to those in the middle, i.e., the middle class. Those running to either the left or right extremes were not likely to be elected. Still, the roots of the median voter theorem lie in Anthony Downs’s classic 1957 work An Economic Theory of Democracy. A work in public choice theory, Downs argued that public officials, institutions and even political parties had respective interests that they sought to maximize. Because elected officials sought to be reelected as their primary goal, they would naturally tend to favor the interests of the more affluent who could be counted on to contribute to their campaigns, and who were also more likely to vote. The need of members of Congress to raise huge sums of money just to be reelected has made this a self-fulfilling property. Meanwhile, public officials would nonetheless seek to purchase the quiescence of lower income voters by offering them programs that would enhance their utility. This in turn would free them up to pursue the interests of the more affluent. Of course, Marx referred to this as throwing the masses a bone. And yet, contained in this formulation would appear to be an assumption that there is a median voter whose quiescence would from time to time need to be purchased in order for these public officials to retain their power. At the very least, they would have to pay lip service to the middle. This idea only received further refinement in the Meltzer-Richards version of the median voter theorem. According to their conception, the greater the distance between the median voter’s income and the average income of society, the higher the level of inequality. As they assumed the remedy to inequality to be redistribution, the median voter, they argued, was choosing the size of government because the median voter was effectively choosing the tax rate. Depending on how much inequality there was, the median voter was choosing how much spending would need to occur in order to purchase the quiescence of lower income voters. All of this presupposes the existence of a middle class, but what happens when the middle class is in decline as increasing inequality has come to signify? Studies of Congress show that members are more responsive to those at the upper end of the distribution, and not at all responsive to those at the bottom. Here the implication would appear to be clear: there is no longer a median voter to choose the size of government. Moreover, there is no longer a need for members of Congress to even purchase the quiescence of those on the bottom. From an efficiency perspective, Congress only needs to represent the interests of the monied interests. Representing the interests of the monied interests means that policies that favor their interests will be pursued at the expense of those still in the middle and below. Over the last few decades, we have seen a policy assault on labor market institutions like unions and the minimum wage. Institutions that prop up wages only hurt the shareholder value of those at the top of the distribution. We have also seen the National Labor Relations Board (NLRB) stacked with people who are anti-labor. Similarly, more states in recent years have passed right-to-work laws, thereby making it more difficult to organize labor unions. This isn’t to mention deregulation and tax reforms favoring the wealthy As the Fed continues to hike interest rates in its efforts to control inflation, we don’t see any serious discussion of a wage policy, which would maintain aggregate demand and serve to stave off a recession. On the contrary, a recession is often viewed as the remedy for inflation. As much as inflation, because of higher prices, hurts workers, inflation is particularly harmful to those at the top whose investments and savings are devalued as a result. One, then, has to wonder if we might not see governing officials more responsive to the needs of everyone were there a more equitable distribution of wealth and income. The political economy of inequality, then, only distorts democratic governance as the power imbalance effectively renders many, if not the majority of our citizens voiceless. Even if more programs are put in place to increase their money utility for the purpose of purchasing their quiescence, this only further undermines their autonomy, which is another essential ingredient of democracy.

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