The Inequality Trap

May 25, 2018

This feature is part of an ongoing RSF blog series, Work in Progress, which highlights some of the research of our current class of visiting scholars.

Though the Great Recession has been declared officially over and the unemployment rate is lower than it has been in years, millions of Americans continue to experience economic hardship. For example, a new report released this week by the Federal Reserve shows that approximately 40 percent of adults in the U.S. today say they would not be able to cover an unexpected $400 expense. A number of studies on the yawning wealth and income gaps in the U.S. further suggest that economic inequality shows no sign of decreasing.

One troubling, lesser-examined effect of rising economic inequality relates to political inequality. While plenty of evidence suggests that the right combination of policies and public investments can ameliorate or reverse economic inequality, instituting these reforms often seems nearly impossible. What accounts for this stasis? 

At RSF, visiting scholar Nathan Kelly (University of Tennessee) is exploring the relationship between economic and political inequality. His research focuses on how high levels of economic inequality can produce an “inequality trap,” or a cycle in which economic inequality reinforces itself by changing how the political system functions. In a new interview, he outlined the factors that contribute to this feedback loop and discussed our prospects for breaking out of the inequality trap.

Q. Your current research looks at the ways in which economic inequality feeds back into the political system in what you call a “political inequality trap.” How is this feedback loop produced? What are some examples of the inequality trap in action today?

Kelly: One of the core arguments that I'm building on is that economic well-being and political power are intertwined. The rich have more political power than the poor, and the wider the gap is between the rich and the poor the more politically advantaged the rich become. 

This idea has a long history, and various versions of the argument have appeared for decades across multiple disciplines. In the past 20 years or so, we've seen a growing body of quantitative and qualitative evidence that shows several particular ways in which the rich are empowered by their money in the American democratic system. Kay Schlozman and her colleagues have carefully documented how the interest system is skewed toward wealthy interests. Martin Gilens and Benjamin Page have demonstrated that policy outcomes align more closely with the preferences of the rich than the poor. Jacob Hacker and Paul Pierson put organizational power imbalances at the heart of their account of rising inequality in the United States. Comparative work in the power resources tradition points in this direction as well.

While existing work has shown that people with money tend to have more power in democratic systems than those who are poorer, efforts to link rising inequality to greater political power imbalances haven't produced evidence of a clear link. That is to say, we have some pretty clear evidence that there are biases toward those with money in American politics, but it's not clear that those biases really become more pronounced as inequality rises. I'm trying to take a new look at the question of whether economic inequality can reproduce itself through the political system. The rich have certain advantages, but can those at the top of the economic heap use politics to maintain or even exacerbate big economic gaps between the top and everyone else? 

I focus a lot of my attention on how income concentration and political outcomes have changed over a long period of time, over a century in much of the analysis. I focus on four primary ways that economic inequality can reinforce itself through the political system: 1) By making inequality-enhancing policies easier to enact; 2) By making the consequences of policy inaction more inegalitarian; 3) By making it harder for parties supporting redistribution (Democrats in the American context) to win elections; and 4) Producing more conservative policy preferences in an important subset of the electorate. 

I find systematic evidence that feedback from inequality to politics happen through each of these four pathways, and current political events provide some useful examples of the broader patterns that I identify. To start with elections, I find that Republicans tend to perform better (and Democrats worse) when there are higher levels of inequality. Of course, it's not impossible for Democrats to win even when inequality is very high—there are many other fundamental dynamics at work, such as partisanship, economic growth, unemployment, and so on—but the tendency is for Democrats to perform worse in contexts of higher inequality. It's not hard to see how the 2016 election fits into this pattern. Despite some efforts during the Obama administration to reverse inequality, those efforts had not really made a substantial dent in inequality, with historically high gaps between the rich and the rest during the 2016 election. And Republicans did better than many political observers expected. There are certainly other ways to explain the 2016 election, but the outcome is not inconsistent with the long-running pattern that I have found of better performance for Republicans when inequality is high.

That takes me to policy action and policy inaction. It should be no surprise that electing more Republicans produces less egalitarian policy outcomes. The latest package of tax cuts is a clear example of that. I also find evidence that Democrats and Republicans are more likely to find at least a modicum of agreement on inegalitarian policies as inequality rises. For example, the Democratic Leadership Council gained traction as inequality was increasing dramatically. And partially as a result of electing a Democratic president solidly in the DLC camp, Democrats put up little fight when financial deregulation was being championed by Republican Congressional leaders. While there are aspects of the financial deregulation that culminated in the 1990s that have merit, those policy choices accelerated the rise of inequality. We are seeing a sort of replay of that dynamic now, with many Democrats joining with Republicans to claw back some of the new financial regulations put in place by Dodd-Frank. 

On the other side of the coin, it is always hard to enact new policies in the American system with its biases toward the status quo, multiple veto points, and need for consensus. We saw how that plays out in a context of high inequality in the Obama era. Even with unified Democratic control for a couple of years, it was a challenge to pass a raft of new equality-enhancing policies. Other than the Affordable Care Act, there was not nearly as much action as progressive activists would have liked. I find that the distributional consequences of inaction are much different when inequality is high than when it is low. Policy inaction in the presence of low inequality essentially has no effect on inequality. But when inequality is high, policy inaction further exacerbates inequality. And that seems to be the pattern during the Obama presidency.

Q. While plenty of research has shown that conservative economic policies such as financial deregulation and paring back the social safety net increase or exacerbate inequality, in what ways does economic inequality lead to more conservative opinions? Do Republicans benefit electorally when inequality is higher?

Public opinion is the one mechanism I haven't talked about yet. It's easy to assume that public opinion can be an important mechanism to rein in inequality. Surely, when inequality rises, the public as the great voice of democracy will demand changes to policy to make outcomes more equal. But that does not seem to happen. 

There is some good experimental evidence that people become more supportive of redistributive policies if confronted explicitly enough with information about rising inequality. But in the actual information environments in which opinions form, this does not seem to happen very often. Part of this is connected to partisan predispositions. Some of it is connected to the fact that policy discussions are often muddled and those opposing redistribution have plenty of incentives to cloak distributive consequences in policy debates. And there is also the problem of ceiling effects, in which support for many redistributive policies is already very high so it's hard for support to move higher in the face of rising inequality. So it actually seems to be pretty rare that opinion shifts substantially in favor of redistribution when inequality rises. In fact, I find some evidence that opinion among a subset of the population (racially biased whites) moves in the opposite direction, becoming less supportive of policies that fight inequality when inequality is higher. 

The bottom line here is that public opinion, even if it were faithfully represented in the domain of redistributive policymaking, is not likely to push back against rising inequality. Maybe there is some threshold at which the opinion dynamics change. But we haven't gotten there yet.

And, again, we can see these patterns in contemporary American politics even though my analysis focuses mostly on historical evidence. There is this ongoing debate about whether economic dissatisfaction or racism produced support for Trump in 2016. I think both are at work and it will be nearly impossible to disentangle the two. In my work, economic inequality (which is not exactly the same as the economic stagnation of the working class but is related) becomes a predictor of voting for Republicans and being less supportive of redistributive policies only among those who are racially biased. By the same token, these racist attitudes are not as politically relevant when inequality is low. So it really is a combination of economic conditions and racial bias that generate the patterns we are observing in American politics. 

Q. If inequality leads to political outcomes that beget more inequality, how do we exit the feedback loop? What kind of policy solutions might help break the cycle?

There is obviously a long list of policy prescriptions that we know reduce inequality if enacted. The hard part is enacting those policies, and it's harder to make the politics work in favor of those policies when inequality is high than when it is low. So this is a really hard problem. 

Exiting this trap is likely to take some combination of political leadership, organizational strategy, and luck. On the political leadership front, Democrats in particular have to place broadly egalitarian policy at the forefront of their agenda. When they regain power, and they likely will due to the general political dynamics of the American system, inequality or not, they have to focus on policies that reduce economic inequality both by redistributing income and by leveling the playing field of the economic market. The former is probably a lot more straightforward than the latter. But doing things to enhance the bargaining power of employees is really essential. They also need to prioritize policies that enhance little-d democracy—expanding voting rights and democratizing money in politics to name just two. 

That is obviously a whole lot to bite off, and I don't have the answers about exactly which items need to take top billing. But a pro-democracy agenda that strives to promote an economy that works for everyone would be a recipe for progress on the inequality trap front. While this is likely to be primarily a progressive agenda that will fit best in the Democratic party, progressive policymakers shouldn’t pass up opportunities to work with more conservative policymakers where they exist. For instance, there is some support among libertarians for limits on non-compete clauses in contracts, and this is one way to enhance the bargaining power of workers. 

I would also add that this is an agenda that does not necessarily have to force a choice between targeting working class whites and favoring what some call an identity politics strategy. There should be a focus on policies that include more people in politics and in the economy. That may sound like typical identity politics. But it provides a way to connect with persuadable suburbanites and rural whites as well.

In terms of a movement, there are signs that it's starting to happen. There are lots of different strands, but efforts from Black Lives Matter to the Women's March to the Gun Control movement all push in basically similar directions as far as the inequality trap is concerned. That energy needs to be harnessed to elect policy makers who are supportive of an egalitarian agenda. That's basically going to be an internal debate among Democrats, and there is going to be a lot of back and forth about ideological purity versus centrist general-election strategy. It will be a challenge to sustain the movement, particularly if and when Democrats do successfully gain control of any policymaking institutions. 

And on top of this it will likely take some luck and good timing as well. For example, a domestic terror attack from a foreign source is not likely to help in an escape from the inequality trap. Another economic crisis might be helpful with the right leaders in place, but at what human cost in the short term? Events along the way will matter. And if the events create tailwinds for those recognizing and wanting to get out of the current pattern of economic and political inequality, that would be good luck.

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