Growth, Inequality, Policy, and
Power: A Theory of (Almost)
Everything
Jared Bernstein
Center on Budget and Policy Priorities
bernstein@cbpp.org
Daniel Thursz Distinguished Professor of Social
Justice Lecture
3/9/12

The Model
• Normal times:
Growthreduced poverty, rising living
standardsopportunitiesmobility
• Inequality Wedge:
Growth[ineq wedge diverts*]poverty and
wage stagnationless access to
opportunitydiminished
mobilityconcentrated influencemore
inequalityvicious cycle
*See Appendix A (last slide) re factors behind higher inequality. 2

Model, cont…
• Feedback loop from unequal growth to income
concentration, and…
• Power concentration
• Blocks policies that would ameliorate ineq’s
impact (unions, min wg, full employment,
manufacturing policy, progressive taxation, amply
funded gov’t, safety net)
• Promote policies that exacerbate inequality
(trickle down tax policies, deregulation of
financial markets, campaign finance)
• VICIOUS CYCLE
3

Policy Changes Predicted by the Model
• Regressive tax changes, trickle down, favor capital incomes over
labor (see next two slides)
• Deregulate financial markets
• Privatize social insurance
• Eroding labor standards (min wage, labor protections)
• Diminished unionization; opposition to collective bargaining
• Pro outsourcing
• Monetary policy favoring low inflation over full employment
• Diminished gov’t commitment to education
• Eroding safety net
• Anti-Keynesianism; pro austerity
• Let-it-rip campaign finance
• Smaller gov’t outlays as share of GDP
4

Evidence, Part 1: Inequality Hits Middle Incomes and
Poverty
• Inequality has gone up and that has contributed to higher poverty and
stagnant growth in middle-incomes.
Full employment
5

“Sticky” pov rates
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Source: US Census Bureau, and Mishel et al, State of Working America

7

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Evidence, Part 2: Opportunity
• These dynamics have led to diminished opportunities for less advantaged
households.
9
Source: Whither Opportunity, Russell Sage

Enrichment Expenditures: music and art lessons, books, sports, tutoring.
Source: Whither Opportunity? Russell Sage 10

Dif=0.45
Dif=0.31
From Baily, Dynarski, Chapter 6, Whither Opportunity 11

12
Dynarski et al, 2011

13

Evidence #3: Mobility Has Gone Down a Bit and is Relatively Low in US
Sources: Katherine Bradbury, 2011; Miles Corak, 2011 14

15

Evidence #4: Inequality and Political Influence
Martin Gilens, Affluence and Influence, forthcoming:
90th 90th
When the preferences of low and middle income Americans differ from those of the
wealthy, “government policy appears to be fairly responsive to the well-off and virtually
unrelated to the desires of low and middle income citizens.” 16

• Bartels (2005): …Senators appear to be considerably more
responsive to the opinions of affluent constituents than to the
opinions of middle-class constituents, while the opinions of
constituents in the bottom third of the income distribution have
no apparent statistical effect on their senators’ roll call votes.
17

Income and Elections, Participation
Sources: 1, Campaign Finance Institute (Senate is my calculation of moving avg); 2-4 Gilens, forthcoming 18

CBO: The equalizing effect of transfers declined over the 1979–
2007 period primarily because the distribution of transfers became
less progressive. The equalizing effect of federal taxes also declined
over the period, in part because the amount of federal taxes shrank
as a share of market income and in part because of changes in the
progressivity of the federal tax system.

Lowering Top Marginal Tax Rate Associates with Greater Ineq, Not
Faster Growth
Source: Piketty, Saez, Stantcheva, 2011 20

21

TANF Cases to Families in Poverty Ratio Illustrates Weakening
of TANF as a Safety Net Over Time
22

23

Problems with the Model
• Causality: inequality clearly associated with these
developments, but few causal links…
– BUT random assignment finds lasting (and “sleeper”)
effects
• Timing: Some of this stuff (test score gaps, “enrichment
goods”) was happening before inequality took off
– BUT greater income concentration exacerbates these
relations
• Mobility: It hasn’t changed much, if at all.
– TRUE but it hasn’t gone up and appears to have worsened
for subgroups.
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Problems with Model, cont…
• The top 1% includes both the Koch bros and George Soros
– TRUE but the former seem better organized to perpetuate
model than the latter are to reverse it. Also, self-fulfilling
prophecy of gov’t failure.
• Growth “exogenous” in model
– Maybe it’s not, which is all the more reason to fix this; rich
area of research.
• This is all ridiculously obvious: “Them that’s got shall
get”…“There are two things important in politics…”
– TRUE but the fact that something’s obvious doesn’t mean
it’s not a problem!
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How Do We Fix This??!!
• Campaign finance reform
• Efficient gov’t sector (inefficient gov’t also reinforces cycle)
• Clear-eyed look at what’s coming and how that relates to
role of gov’t (demographics, climate, innovation, global
connectedness)
• Much more intensive research and outreach agenda re
trickle down, deregulatory failures
• Political dysfunction should scare people (debt ceiling)
• Remember compromise?
• Research is important but equally important is how we
explain, disseminate it
• Fairness, common sense, YOYOs vs WITTs
• What else?
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Appendix A: Main Causes of Rising Inequality
• Increased globalization, particularly import penetration from low-wage
producers;
• Diminished unionization, as unions are associated with a more equitable
distribution of earnings;
• Higher unemployment, which like less unionization, reduces the
bargaining power of many in the workforce;
• Ongoing technological change, which increases the relative demand for
more highly educated workers;
• The decline in the real value of the minimum wage;
• Regressive changes in the tax code, particularly tax cuts to high marginal
income tax rates and rates on non-labor income;
• Financial deregulation and “innovation” and the increased
“financialization” of industry: the increase of the financial sector as a
share of economic activity and the associated growth of income sources,
such as capital gains, that are concentrated at the top of the income scale.
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