The reality of widening economic inequality is now widely acknowledged. But its consequences remain a matter of dispute. Economists are still divided on whether its distortionary consequences are unambiguously harmful.
This blog has argued in multiple posts that the most harmful effect of widening inequality is in terms of its impact on the political system. The extreme concentrations of wealth and income lead to the emergence of a plutocratic elite who capture the political system and set the rules of the game in their favour and against the interests of the overwhelming majority of citizens. In other words, it creates the condition for the breakdown of the social contract and erosion of democratic accountability and popular legitimacy for the rules of the game.
The Institute for New Economic Thinking has a new paper by Shawn McGuire and Charles Delahunt which use AI and machine learning to show that changes in policy directions is dictated by opinion shifts among those at the 90th percentile of income and above (HT: Rana Faroohar).
They build on a 2014 work by Martin Gilens and Benjamin Page, who scrutinised more than 1700 cases over 20 years that tracked public opinion about proposed policy changes and how policy responded. The conclusion of Gilens and Page,
Not only do ordinary citizens not have uniquely substantial power over policy decisions; they have little or no independent influence on policy at all.
McGuire and Delahunt use random forest classifiers, from machine learning, and find that "the central hypothesis in political science and public economics – that public opinion is the mainspring of public policy in countries like the United States – falls in a random forest". Thomas Ferguson summarises their work,
They find that just a handful of variables suffice to explain a great deal: In contrast to so many political scientists, who linger over possibilities that the political system somehow responds to less affluent Americans in the normal course of things, McGuire and Delahunt flatly dismiss notions that anyone’s opinion about public policy outside of the top 10% of affluent Americans independently helps to explain policy. Knowing the policy area, the preferences of the top 10%, and the views of a handful of interest groups suffice to explain policy changes with impressive accuracy. Resorting to the preferences of less affluent groups actually degrades predictive accuracy... Their conclusion voices the suspicion that the “likely lodestar variable affecting policy outcomes…is the transfer of large amounts of money to policy makers from the wealthiest sources focused intensely on particular policies.”
Ferguson's takeaway in terms of political economy lessons are apt,
Modern political economy has to recognize action at a distance: To understand, say, Harry Reid when he was leader of the Senate Democrats, you would be better advised to analyze his relations with Wall Street or the Chicago Mercantile Exchange than puzzling over any level of Nevada opinion, save perhaps the casinos. The judgement is not partisan: The idea that Mitch McConnell can be understood by reference mainly to even very highly remunerated opinion in his home state is preposterous. He survived as Majority Leader of the Senate in 2016 only because of his ties to super-rich Republican donors who nearly all live out of state. It is high time to start framing problems in terms of money in politics, not public opinion...
Anyone who spends much time in archives scrutinizing real cases quickly realizes that individual firms carry most of the water in major policy battles: they foot the bills for most lobbying efforts and make most political contributions. When business associations mobilize for keeps, they customarily rely on their “stars” from individual firms to help carry the ball. They also typically act alongside swarms of individual firms mounting campaigns of their own, while some large firms use associations to disguise their own presence... The political coalitions at work in these cases quite transcend business associations. Individual firms and investors virtually always dominate.
Ferguson points to a new emerging "affluent authoritarianism",
The corollary is that there is thus little reason to expect that many important issues of great concern to ordinary Americans are likely to find expression in the political system – as the battles over health care in recent years illustrates vividly. In money-driven elections and policymaking, you will have candidates, elections, real competition that is not collusion, and all kinds of noise, but when the smoke clears – and there will be lots of handsomely subsidized smoke – average (“median”) voters will not determine where policy settles. This doesn’t mean that elections do not present real choices: divisions among oligarchs can really matter. But if you want to tax the rich or pass Medicare for all, you will need a real mass movement not dependent on the good will of the superrich. Maguire and Delahunt’s important new paper makes it obvious that to understand how policy is hammered out, you need to analyze policy formation as a component of a much bigger system of political money.
In fact, as Page and Gilens allude to, the real opinion formers may not even be the top 10%, but the top 1 or 2 percent.
This applies just as much or with even greater force to India, which starts off with a deeply unequal baseline of economic distribution, transmission channels of political accountability weak, and where business concentration and economic inequality is even more deeply enmeshed into the political processes. The social contract is tattered to a very high degree.
Underlining this, Scott Galloway points to this stunning statistic about the role of wealth and political influence in the US,
Just 400 wealthy families provide about half the funding for presidential campaigns, and they speedball their influence through think tanks, legal advocacy groups, and friendly media. Rupert Murdoch, the Mercer family, Michael Bloomberg, Mark Zuckerberg, and Jeff Bezos all shape our views and influence national policy.
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