How the State Can Make Inequality Worse

How the State Can Make Inequality Worse

How the State Can Make Inequality Worse

From zoning and licensing boards to bank bailouts, the state has often been captured by corporations and the wealthy.


The left has always been of two minds about the state. At times, it has looked to the state to correct the injustices of the market—through regulation, litigation, and social spending. In this mode, the left has projected a positive (and sometimes romantic) image of the public sector as the venue for acting on our altruistic and collective motives. Inequality in this vision is a product of a state that has been unduly limited in its ability to push back against the market and its unequal returns.

At other times, though, a darker image of the state has prevailed on the left. Here the state is seen as an instrument of the economically powerful, rather than a source of countervailing power. This vision, which traces back to Marx’s famous account of the state as the executive committee of the bourgeoisie, animated turn-of-the-century populist crusaders against the state’s subservience to Eastern banks, as well as 1970s-era Naderism and its critique of bureaucratic capture in industries like trucking and airlines. In this vision, the state, far from being a savior, is the source of invidious inequality—or at least a co-conspirator with the market in its production.

Moderate, reformist liberalism or social democracy has generally gravitated toward the first vision of the state. “Getting to Denmark”—with its conscientious civil servants administering a comprehensive welfare state—has dominated the dreams of the mainstream left. As vital as that tradition is, though, it alone is not adequate to the needs of our time. To meet contemporary challenges, people on the left need to look beyond the public-spirited potential of the state and come to terms with its dark side. In particular, in wrestling with the problem of steep and rising economic inequality, it is necessary to recognize that the state is part of the problem, as well as part of the solution.

It isn’t difficult to compile a tally of recent examples in which the state actively exacerbates inequality. The “financialization” of the economy is well-known: The financial sector rocketed from 4.9 percent of GDP in 1980 to 8.3 percent in 2006, a rise that was temporarily reversed by the Great Recession but has since recovered. The federal government played an active role in this process: stimulating the explosion in mortgage securitization through government-sponsored enterprises (“Fannie” and “Freddie”), encouraging debt-fueled overexpansion with an explicit safety net and an implicit promise of “too big to fail” bailouts, and subsidizing active management of assets (and the accompanying lucrative fees) through tax-favored 401ks and IRAs. While a failure to act, for instance on the growth of derivatives and the deterioration of mortgage-underwriting standards, certainly played a role in the growth of financialization, the state was by no means just a passive onlooker in the process.

As the financial sector swelled, so too did incomes in that sector. In 1980, comparably skilled workers in finance and other sectors earned basically the same income, but by 2006 jobs in financial services were paying 50 percent more. Financial professionals’ and managers’ representation in the top 1 percent of earners jumped from 8 percent in 1979 to 14 percent in 2005. None of this was inevitable; an alternative set of policies would have produced a very different distribution of wealth.

The state has also worked to redistribute wealth upwards through its interventions in the housing markets of high-income cities. Up through the 1980s, overall housing supply in a given metropolitan area generally kept pace with demand, even if zoning and other land-use restrictions affected the location of new housing. In recent decades, however, this process has been short-circuited, as existing homeowners in places like Boston; Washington, DC; New York City; Los Angeles; San Francisc; and San Jose have used their political power at the local level to step on the hose of new housing construction. As David Schleicher of Yale Law School has argued, the hyper-localism of zoning decisions means that, even though these regions are desperate for new housing, the way we organize zoning decisions gives vastly outsized weight to the preferences of existing homeowners at the expense of everyone else.

With new housing supply constricted, growing demand to live in America’s high-productivity coastal cities has been met with exploding prices rather than a rise in urban population. Between 1970 and 2000, for instance, construction costs increased only 6 percent in inflation-adjusted terms, but average home prices in San Francisco spiked by a whopping 270 percent. Matthew Rognlie of Northwestern University has found that escalating housing values, rather than financial assets, explain virtually all the increase in capital’s share of national income made famous by Thomas Piketty. As Rognlie argues, “the rise in housing’s contribution to the capital share…can be explained in part as a result of scarcity.” This bestows huge unearned gains on the already affluent, while blocking millions from economic opportunity and social mobility.

Finance and housing barely scratch the surface of the ways that the state has put its thumb on the scale in favor of the rich. The increasing stringency of intellectual property protection in the past few decades has juiced the already powerful inegalitarian trends in the entertainment and pharmaceutical industries. As economist Dean Baker has argued, occupational licensing has prevented doctors and dentists from facing the same downward pressure on their incomes that lower-income workers have faced from trade and immigration. State franchising laws have propped up car dealers by preventing car manufacturers from selling directly to consumers.

In all these areas and many more, private interests have used the state to protect themselves from competition or as a source of subsidy. Budgetary pressures and austerity politics have made matters worse, as policymakers seek ways to do policy on the cheap without having to resort to taxes and transparent, on-budget transfers. The resulting over-reliance on tax preferences and the regulatory code, where distributional consequences are harder to trace, has allowed privileged insiders to game the system and funnel resources toward themselves. If we are going to turn the tide on inequality, the left needs an agenda for constraining the state’s role in regressive regulation—at the same time that it seeks to expand its role in social insurance and increase the bargaining power of labor.

Ever since the Progressive Era, people on the left have been primarily concerned with removing restraints on the government’s ability to intervene in the economy. But we have learned that some of those tools are far more likely to be captured by the wealthy and organized than are others. State licensing boards, for instance, appear to regularly operate as extensions of the professions they regulate, rather than protectors of the public interest. Antitrust laws are beginning to be used to rein in their scope and jurisdiction, but far more could be done to limit their power. Local governments have used their exceptional powers to stymie building in high-growth cities. Tighter state or even federal controls on their ability to do so, of the kind that California is just starting to put in place, would generally serve the interests of the less advantaged.

How can we turn back the forces of upward redistribution? The power of private interests to use the state for their own ends is facilitated by their control over information. Opponents of concentrated wealth have devoted most of their time to reducing the flow of money into the political system. These efforts, so far, have mostly failed. But equally important is the flow of information, where highly organized, wealthy industry incumbents can shape what politicians know and what they think is possible and responsible. Ever since the 1990s, Republicans have waged war against the government’s own ability to gather and analyze policy-relevant information, in particular by cutting congressional staff and support agencies like the Office of Technology Assessment. As Lee Drutman of New America has argued, this gives enormous power to lobbyists, who can claim that any policy move contrary to their clients’ interests will have dire, potentially devastating consequences—claims that members of Congress, with staffs dominated by inexperienced 20-somethings, currently have little capacity to evaluate. Expanding and professionalizing congressional staffs, as well as upgrading the executive branch’s ability to gather and analyze data, would help to reduce this information asymmetry and put policymakers in a better position to discern and govern in the public interest.

Left anti-statism is unlikely to inspire mass mobilization—as opposed to, say, campaigns for single-payer health care or a guaranteed income. The good news is that, unlike many issues where those on the left are in pitched battle against the forces of conservatism, left anti-statism actually overlaps with those parts of conservatism that are not captured by corporate interests. Car dealers, for instance, may give a large percentage of their donations to Republican officials, but conservative and libertarian public-interest groups have different financial bases and ideological commitments that make them more likely to challenge this sort of upward redistribution. These groups are potentially valuable coalition partners, even if the roots of their anti-statism are different than those on the left. Many of these organizations are actually eager to find partners on the left for these causes, even if they sharply oppose progressives on other tax and budget issues.

Conservatives are fond of warning that a government big enough to give you everything you want is also big enough to take away everything you have. Progressives should keep in mind their own version of that old saw: a government powerful enough to redistribute from rich to poor is powerful enough to redistribute in the opposite direction. Redistribution from rich to poor is a good idea, and more vital now than ever. But it’s time for progressives to develop and fight for their own version of limited government, where this time the limits are on government’s ability to play Robin Hood in reverse.

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