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.