The power of the rich

by Russ Roberts on February 22, 2011

in Politics, Taxes, Uncategorized

I have written here a number of times in recent weeks about how Wall Street and the banking industry benefited from policy interventions over the last 35 years or so and helped create the crisis. This post is an example of what I have been writing. I think fixing the relationship between the financial sector and the power of government, particularly the Fed, is the single biggest problem we face as a democracy and as an economy. The exploitive nature of this relationship, what is often called crony capitalism, has led to terrible misallocations of capital and to resentment from the body politic about the fairness of the political process.

But I do not believe we live in an oligarchy where the rich control the political process in the way they do in some other countries. Paul Krugman, for example, writes as if that were the case:

On paper, we’re a one-person-one-vote nation; in reality, we’re more than a bit of an oligarchy, in which a handful of wealthy people dominate.

Given this reality, it’s important to have institutions that can act as counterweights to the power of big money. And unions are among the most important of these institutions.

You don’t have to love unions, you don’t have to believe that their policy positions are always right, to recognize that they’re among the few influential players in our political system representing the interests of middle- and working-class Americans, as opposed to the wealthy. Indeed, if America has become more oligarchic and less democratic over the last 30 years — which it has — that’s to an important extent due to the decline of private-sector unions.

I don’t believe Krugman’s argument passes the sniff test. I don’t think labor unions represent the interests of middle- and working-class Americans today or thirty years ago. I don’t think the increasing oligarchic nature of our democracy comes from the decline of private sector unions. If anything, it comes from the willingness of economists like Paul Krugman to defend Fed and Treasury interventions as laudable and unavoidable.

Here is Bob Herbert in a similar vein:

It doesn’t really matter what ordinary people want. The wealthy call the tune, and the politicians dance.

So what we get in this democracy of ours are astounding and increasingly obscene tax breaks and other windfall benefits for the wealthiest, while the bought-and-paid-for politicians hack away at essential public services and the social safety net, saying we can’t afford them.

These kind of columns in the New York Times sell papers. Readers of the New York Times like feeling that they are victims of some conspiracy to run the country for the benefit of the wealthy. And there is no doubt that Krugman and Herbert are half right–the rich get more say than the little guy. The financial sector and other sectors do play a large role in making sure legislation serves them. That is why I want less powerful government. I don’t know what Krugman and Herbert want. Better government, I guess. Regulation that serves the little guy even though the politicians have little incentive to serve the little guy.

But they are only half right. The rich don’t run the country. They have more power than the poor, yes. But it is hard to understand how essential public services, say, and the safety net are being destroyed or that the rich control the spin on the policy issues when you look at the overall level of government spending and taxes. Government spending has never been bigger. Is that what those rich elites are doing with their political power?

And what about taxes? I know we hear endlessly about how the Bush tax cuts were a giveaway to the rich. But look at the data. These data are from the CBO–from here and here. The first is effective federal tax rates–what proportion of income does a person pay in federal taxes. Federal taxes includes the income tax, but it also includes the payroll tax (which is regressive) the corporate income tax and various excise taxes. The CBO tries to estimate the incidence of those latter taxes as best they can. Here is what it looks like by quintile between 1979 and 2006:

You can see the effects of the Bush tax cuts–the effective tax rate on the rich goes down. But so does the effective tax rate on all the groups. Basically the rich pay about the same tax rate as they did in the mid-1980s. Everybody else pays less.

What about the rich’s share of the total tax burden? For every dollar of revenue to the federal goverment, what proportion comes from the top quintile vs. the rest of the distribution? Again, here are the CBO data:

Not exactly an oligarchy. Maybe it’s at the very top where the power happens? Here are the CBO numbers from 1979 to 2005 (I got lazy and didn’t add in the 2006 numbers to the spreadsheet–it changes nothing) for the top 10%, the top 5% and the top 1%:


Maybe these numbers should be even higher than they are. Or lower. Or maybe all the numbers should be higher instead of spending being lower because of the deficits we’re running. All I’m saying is that these aren’t very supportive of the idea that the rich run the country or that they’ve caused tax policy to change in their favor by some dramatic amount or that they don’t pay much in taxes.

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