1. Rebuilding An Opportunity Society: The Roles of Policy and Power Jared Bernstein Center on Budget and Policy Priorities bernstein@cbpp.org Prepared for Work and Livable Lives Conference St. Louis, MO 2/27/12

2. The Model Normal times: Growth reduced poverty, rising living standards opportunities mobility Inequality Wedge: Growth [ineq wedge diverts*] poverty and wage stagnation less access to opportunity diminished mobility concentrated influence more inequality vicious cycle 2 *See Appendix A (last slide) re factors behind higher inequality.

3. Model, cont… Feedback loop from unequal growth to income concentration, and… Power concentration Blocks policies that would ameliorate ineqs impact (unions, min wg, full employment, manufacturing policy, progressive taxation, amply funded govt, safety net, assets!) Promote policies that exacerbate inequality (trickle down tax policies, deregulation of financial markets, campaign finance) VICIOUS CYCLE 3

4. Evidence, Part 1: Inequality Hits Middle Incomes and Poverty Inequality has gone up and that has contributed to higher poverty and stagnant growth in middle-incomes. Full employment 4

5. Sticky pov rates Source: US Census Bureau, and Mishel et al, State of Working America 5

6. 6

7. Evidence, Part 2: Opportunity These dynamics have led to diminished opportunities for less advantaged households. Source: Whither Opportunity, Russell Sage 7

8. Enrichment Expenditures: music and art lessons, books, sports, tutoring. Source: Whither Opportunity? Russell Sage 8

9. Dif=0.45 Dif=0.31 9 From Baily, Dynarski, Chapter 6, Whither Opportunity

10. Dynarski et al, 2011 10

11. 11

12. Evidence #3: Mobility Has Gone Down a Bit and is Relatively Low in US Sources: Katherine Bradbury, 2011; Miles Corak, 2011 12

13. When the preferences of low and middle income Americans differ from those of the wealthy, government policy appears to be fairly responsive to the well-off and virtually unrelated to the desires of low and middle income citizens. Evidence #4: Inequality and Political Influence Martin Gilens, Affluence and Influence, forthcoming: 90th 13

14. Bartels (2005): …Senators appear to be considerably more responsive to the opinions of affluent constituents than to the opinions of middle-class constituents, while the opinions of constituents in the bottom third of the income distribution have no apparent statistical effect on their senators roll call votes. 14

15. Sources: 1, Campaign Finance Institute (Senate is my calculation of moving avg); 2-4 Gilens, forthcoming Income and Elections, Participation 15

16. Policy Changes Implied by the Model Regressive tax changes, trickle down, favor capital incomes over labor (see next two slides) Deregulate financial markets Privatize social insurance Eroding labor standards (min wage, labor protections) Diminished unionization; opposition to collective bargaining Pro outsourcing Monetary policy favoring low inflation over full employment Diminished govt commitment to education Eroding safety net Anti-Keynesianism; pro austerity Let-it-rip campaign finance Smaller govt outlays as share of GDP 16

17. Taxes and Transfers Less Effective in Reducing Inequality Source: CBPP calculations from Congressional Budget Office data CBO: The equalizing effect of transfers declined over the 1979– 2007 period primarily because the distribution of transfers became less progressive. The equalizing effect of federal taxes also declined over the period, in part because the amount of federal taxes shrank as a share of market income and in part because of changes in the progressivity of the federal tax system.

18. Lowering Top Marginal Tax Rate Associates with Greater Ineq, Not Faster Growth Source: Piketty, Saez, Stantcheva, 2011 18

19. Problems with the Model Causality: inequality clearly associated with these developments, but few causal links… – BUT random assignment finds lasting (and sleeper) effects Timing: Some of this stuff (test score gaps, enrichment goods) was happening before inequality took off – BUT greater income concentration exacerbates these relations Mobility: It hasnt changed much, if at all. – TRUE but it hasnt gone up and appears to have worsened for subgroups. 19

20. Problems with Model, cont… The top 1% includes both the Koch bros and George Soros – TRUE but the former seem better organized to perpetuate model than the latter are to reverse it. Also, self-fulfilling prophecy of govt failure. Growth exogenous in model – Maybe its not, which is all the more reason to fix this; rich area of research. This is all ridiculously obvious: Them thats got shall get…There are two things important in politics… – TRUE but the fact that somethings obvious doesnt mean its not a problem! 20

21. How Do We Fix This??!! Campaign finance reform Efficient govt sector (inefficient govt also reinforces cycle) Clear-eyed look at whats coming and how that relates to role of govt (demographics, climate, innovation, global connectedness) Much more intensive research and outreach agenda re trickle down, deregulatory failures Political dysfunction should scare people (debt ceiling) Remember compromise? Research is important but equally important is how we explain, disseminate it Fairness, common sense, YOYOs vs WITTs What else? 21

22. Appendix A: Main Causes of Rising Inequality Increased globalization, particularly import penetration from low-wage producers; Diminished unionization, as unions are associated with a more equitable distribution of earnings; Higher unemployment, which like less unionization, reduces the bargaining power of many in the workforce; Ongoing technological change, which increases the relative demand for more highly educated workers; The decline in the real value of the minimum wage; Regressive changes in the tax code, particularly tax cuts to high marginal income tax rates and rates on non-labor income; Financial deregulation and innovation and the increased financialization of industry: the increase of the financial sector as a share of economic activity and the associated growth of income sources, such as capital gains, that are concentrated at the top of the income scale. 22