the past quarter-century I’ve offered in articles, books, and lectures an explanation for why average working people
in advanced nations like the United States have failed to gain ground and are under increasing economic stress: Put simply,
globalization and technological change have made most of us less competitive. The tasks we used to do can now be done more
cheaply by lower-paid workers abroad or by computer-driven machines.
My solution—and I’m hardly alone in suggesting this—has been an activist government
that raises taxes on the wealthy, invests the proceeds in excellent schools and other means people need to become more productive,
and redistributes to the needy. These recommendations have been vigorously opposed by those who believe the economy will function
better for everyone if government is smaller and if taxes and redistributions are curtailed.
While the explanation I
offered a quarter-century ago for what has happened is still relevant—indeed, it has become the standard, widely accepted
explanation—I’ve come to believe it overlooks a critically important phenomenon: the increasing concentration
of political power in a corporate and financial elite that has been able to influence the rules by which the economy runs.
And the governmental solutions I have propounded, while I believe them still useful, are in some ways beside the point because
they take insufficient account of the government’s more basic role in setting the rules of the economic game.
yet, the ensuing debate over the merits of the “free market” versus an activist government has diverted attention
from how the market has come to be organized differently from the way it was a half-century ago, why its current organization
is failing to deliver the widely shared prosperity it delivered then, and what the basic rules of the market should be. It
has allowed America to cling to the meritocratic tautology that individuals are paid what they’re “worth”
in the market, without examining the legal and political institutions that define the market. The tautology is easily confused
for a moral claim that people deserve what they are paid. Yet this claim has meaning only if the legal and political institutions
defining the market are morally justifiable.
Most fundamentally, the standard explanation for what has happened
ignores power. As such, it lures the unsuspecting into thinking nothing can or should be done to alter what people are paid
because the market has decreed it.
The standard explanation has allowed some to argue, for example, that the median
wage of the bottom 90 percent—which for the first 30 years after World War II rose in tandem with productivity—has
stagnated for the last 30 years, even as productivity has continued to rise, because middle-income workers are worth less
than they were before new software technologies and globalization made many of their old jobs redundant. They therefore have
to settle for lower wages and less security. If they want better jobs, they need more education and better skills. So hath
the market decreed.
Yet this market view cannot be the whole story because it fails to account for much of what we have
experienced. For one thing, it doesn’t clarify why the transformation occurred so suddenly. The divergence between productivity
gains and the median wage began in the late 1970s and early 1980s, and then took off. Yet globalization and technological
change did not suddenly arrive at America’s doorstep in those years. What else began happening then?
Nor can the
standard explanation account for why other advanced economies facing similar forces of globalization and technological change
did not succumb to them as readily as the United States. By 2011, the median income in Germany, for example, was rising faster
than it was in the United States, and Germany’s richest 1 percent took home about 11 percent of total income, before
taxes, while America’s richest 1 percent took home more than 17 percent. Why have globalization and technological change
widened inequality in the United States to a much greater degree?
Nor can the standard explanation account for why the
compensation packages of the top executives of big companies soared from an average of 20 times that of the typical worker
40 years ago to almost 300 times. Or why the denizens of Wall Street, who in the 1950s and 1960s earned comparatively modest
sums, are now paid tens or hundreds of millions annually. Are they really “worth” that much more now than they
were worth then?
Finally and perhaps most significantly, the market explanation cannot account for the decline in wages
of recent college graduates. If the market explanation were accurate, college graduates would command higher wages in line
with their greater productivity. After all, a college education was supposed to boost personal incomes and maintain American
To be sure, young people with college degrees have continued to do better than people without them. In 2013,
Americans with four-year college degrees earned 98 percent more per hour on average than people without a college degree.
That was a bigger advantage than the 89 percent premium that college graduates earned relative to non-graduates five years
before, and the 64 percent advantage they held in the early 1980s.
But since 2000, the real average hourly wages of
young college graduates have dropped. The entry-level wages of female college graduates have dropped by more than 8 percent,
and male graduates by more than 6.5 percent. To state it another way, while a college education has become a prerequisite
for joining the middle class, it is no longer a sure means for gaining ground once admitted to it. That’s largely because
the middle class’s share of the total economic pie continues to shrink, while the share going to the top continues to
A deeper understanding of what has happened to American incomes over the last 25 years requires an examination
of changes in the organization of the market. These changes stem from a dramatic increase in the political power of large
corporations and Wall Street to change the rules of the market in ways that have enhanced their profitability, while reducing
the share of economic gains going to the majority of Americans.
This transformation has amounted to a redistribution
upward, but not as “redistribution” is normally defined. The government did not tax the middle class and poor
and transfer a portion of their incomes to the rich. The government undertook the upward redistribution by altering the rules
of the game.
Intellectual property rights—patents, trademarks, and copyrights—have been enlarged and extended,
for example. This has created windfalls for pharmaceuticals, high tech, biotechnology, and many entertainment companies, which
now preserve their monopolies longer than ever. It has also meant high prices for average consumers, including the highest
pharmaceutical costs of any advanced nation.
At the same time, antitrust laws have been relaxed for corporations with
significant market power. This has meant large profits for Monsanto, which sets the prices for most of the nation’s
seed corn; for a handful of companies with significant market power over network portals and platforms (Amazon, Facebook,
and Google); for cable companies facing little or no broadband competition (Comcast, Time Warner, AT&T, Verizon); and
for the largest Wall Street banks, among others. And as with intellectual property rights, this market power has simultaneously
raised prices and reduced services available to average Americans. (Americans have the most expensive and slowest broadband
of any industrialized nation, for example.)
Financial laws and regulations instituted in the wake of the Great Crash
of 1929 and the consequential Great Depression have been abandoned—restrictions on interstate banking, on the intermingling
of investment and commercial banking, and on banks becoming publicly held corporations, for example—thereby allowing
the largest Wall Street banks to acquire unprecedented influence over the economy. The growth of the financial sector, in
turn, spawned junk-bond financing, unfriendly takeovers, private equity and “activist” investing, and the notion
that corporations exist solely to maximize shareholder value.
Bankruptcy laws have been loosened for large corporations—notably
airlines and automobile manufacturers—allowing them to abrogate labor contracts, threaten closures unless they receive
wage concessions, and leave workers and communities stranded. Notably, bankruptcy has not been extended to homeowners who
are burdened by mortgage debt and owe more on their homes than the homes are worth, or to graduates laden with student debt.
Meanwhile, the largest banks and auto manufacturers were bailed out in the downturn of 2008–2009. The result has been
to shift the risks of economic failure onto the backs of average working people and taxpayers.
Contract laws have been
altered to require mandatory arbitration before private judges selected by big corporations. Securities laws have been relaxed
to allow insider trading of confidential information. CEOs have used stock buybacks to boost share prices when they cash in
their own stock options. Tax laws have created loopholes for the partners of hedge funds and private-equity funds, special
favors for the oil and gas industry, lower marginal income-tax rates on the highest incomes, and reduced estate taxes on great
All these instances represent distributions upward—toward big corporations and financial firms, and their
executives and shareholders—and away from average working people.
Meanwhile, corporate executives and
Wall Street managers and traders have done everything possible to prevent the wages of most workers from rising in tandem
with productivity gains, in order that more of the gains go instead toward corporate profits. Higher corporate profits have
meant higher returns for shareholders and, directly and indirectly, for the executives and bankers themselves.
worried about keeping their jobs have been compelled to accept this transformation without fully understanding its political
roots. For example, some of their economic insecurity has been the direct consequence of trade agreements that have encouraged
American companies to outsource jobs abroad. Since all nations’ markets reflect political decisions about how they are
organized, so-called “free trade” agreements entail complex negotiations about how different market systems are
to be integrated. The most important aspects of such negotiations concern intellectual property, financial assets, and labor.
The first two of these interests have gained stronger protection in such agreements, at the insistence of big U.S. corporations
and Wall Street. The latter—the interests of average working Americans in protecting the value of their labor—have
gained less protection, because the voices of working people have been muted.
Rising job insecurity can also be traced
to high levels of unemployment. Here, too, government policies have played a significant role. The Great Recession, whose
proximate causes were the bursting of housing and debt bubbles brought on by the deregulation of Wall Street, hurled millions
of Americans out of work. Then, starting in 2010, Congress opted for austerity because it was more interested in reducing
budget deficits than in stimulating the economy and reducing unemployment. The resulting joblessness undermined the bargaining
power of average workers and translated into stagnant or declining wages.
Some insecurity has been the result of shredded
safety nets and disappearing labor protections. Public policies that emerged during the New Deal and World War II had placed
most economic risks squarely on large corporations through strong employment contracts, along with Social Security, workers’
compensation, 40-hour workweeks with time-and-a-half for overtime, and employer-provided health benefits (wartime price controls
encouraged such tax-free benefits as substitutes for wage increases). But in the wake of the junk-bond and takeover mania
of the 1980s, economic risks were shifted to workers. Corporate executives did whatever they could to reduce payrolls—outsource
abroad, install labor-replacing technologies, and utilize part-time and contract workers. A new set of laws and regulations
facilitated this transformation.
As a result, economic insecurity became baked into employment. Full-time workers who
had put in decades with a company often found themselves without a job overnight—with no severance pay, no help finding
another job, and no health insurance. Even before the crash of 2008, the Panel Study of Income Dynamics at the University
of Michigan found that over any given two-year stretch in the two preceding decades, about half of all families experienced
some decline in income.
Today, nearly one out of every five working Americans is in a part-time job. Many are consultants,
freelancers, and independent contractors. Two-thirds are living paycheck to paycheck. And employment benefits have shriveled.
The portion of workers with any pension connected to their job has fallen from just over half in 1979 to under 35 percent
today. In MetLife’s 2014 survey of employees, 40 percent anticipated that their employers would reduce benefits even
The prevailing insecurity is also a consequence of the demise of labor unions. Fifty years ago, when General
Motors was the largest employer in America, the typical GM worker earned $35 an hour in today’s dollars. By 2014, America’s
largest employer was Walmart, and the typical entry-level Walmart worker earned about $9 an hour.
This does not mean
the typical GM employee a half-century ago was “worth” four times what the typical Walmart employee in 2014 was
worth. The GM worker was not better educated or motivated than the Walmart worker. The real difference was that GM workers
a half-century ago had a strong union behind them that summoned the collective bargaining power of all autoworkers to get
a substantial share of company revenues for its members. And because more than a third of workers across America belonged
to a labor union, the bargains those unions struck with employers raised the wages and benefits of non-unionized workers as
well. Non-union firms knew they would be unionized if they did not come close to matching the union contracts.
Walmart workers do not have a union to negotiate a better deal. They are on their own. And because less than 7 percent of
today’s private-sector workers are unionized, most employers across America do not have to match union contracts. This
puts unionized firms at a competitive disadvantage. Public policies have enabled and encouraged this fundamental change. More
states have adopted so-called “right-to-work” laws. The National Labor Relations Board, understaffed and overburdened,
has barely enforced collective bargaining. When workers have been harassed or fired for seeking to start a union, the board
rewards them back pay—a mere slap on the wrist of corporations that have violated the law. The result has been a race
to the bottom.
Given these changes in the organization of the market, it is not surprising that corporate profits have
increased as a portion of the total economy, while wages have declined. Those whose income derives directly or indirectly
from profits—corporate executives, Wall Street traders, and shareholders—have done exceedingly well. Those dependent
primarily on wages have not.
The underlying problem, then, is not that most Americans are “worth”
less in the market than they had been, or that they have been living beyond their means. Nor is it that they lack enough education
to be sufficiently productive. The more basic problem is that the market itself has become tilted ever more in the direction
of moneyed interests that have exerted disproportionate influence over it, while average workers have steadily lost bargaining
power—both economic and political—to receive as large a portion of the economy’s gains as they commanded
in the first three decades after World War II. As a result, their means have not kept up with what the economy could otherwise
To attribute this to the impersonal workings of the “free market” is to disregard the power
of large corporations and the financial sector, which have received a steadily larger share of economic gains as a result
of that power. As their gains have continued to accumulate, so has their power to accumulate even more.
circumstances, education is no panacea. Reversing the scourge of widening inequality requires reversing the upward distributions
within the rules of the market, and giving workers the bargaining leverage they need to get a larger share of the gains from
growth. Yet neither will be possible as long as large corporations and Wall Street have the power to prevent such a restructuring.
And as they, and the executives and managers who run them, continue to collect the lion’s share of the income and wealth
generated by the economy, their influence over the politicians, administrators, and judges who determine the rules of the
game may be expected to grow.
The answer to this conundrum is not found in economics. It is found in politics. The changes
in the organization of the economy have been reinforcing and cumulative: As more of the nation’s income flows to large
corporations and Wall Street and to those whose earnings and wealth derive directly from them, the greater is their political
influence over the rules of the market, which in turn enlarges their share of total income.
The more dependent politicians
become on their financial favors, the greater is the willingness of such politicians and their appointees to reorganize the
market to the benefit of these moneyed interests. The weaker unions and other traditional sources of countervailing power
become economically, the less able they are to exert political influence over the rules of the market, which causes the playing
field to tilt even further against average workers and the poor.
Ultimately, the trend toward widening inequality in
America, as elsewhere, can be reversed only if the vast majority, whose incomes have stagnated and whose wealth has failed
to increase, join together to demand fundamental change. The most important political competition over the next decades will
not be between the right and left, or between Republicans and Democrats. It will be between a majority of Americans who have
been losing ground, and an economic elite that refuses to recognize or respond to its growing distress.