Winnter-Take-All Economy

For my entire life I've heard the phrase, "the rich are getting richer and the poor are getting poorer".  Is this actually happening?  If so why?

I recently stumbled across a very interesting article in Foreign Affairs discussing this very phenomenon.  The author, Robert C. Lieberman, argues against convention wisdom that increasing inequality has been caused entirely by market forces.  He argues that congressional policies have “skewed the playing field towards the rich”.  Read the whole article here.  I've tried to summarize Lieberman's article below:

Current Situation:

·         The share of total income going to the top one percent has increased from roughly eight percent in the 1960s to more than 20 percent today.

Income inequality in the United States is higher than in any other advanced industrial democracy and by conventional measures comparable to that in countries such as Ghana, Nicaragua, and Turkmenistan.
It breeds political polarization, mistrust, and resentment between the haves and the have-nots and tends to distort the workings of a democratic political system in which money increasingly confers political voice and power.

Typical Explanations:

It is generally presumed that economic forces alone are responsible for this astonishing concentration of wealth.

Technological changes, particularly the information revolution, have transformed the economy, making workers more productive and placing a premium on intellectual, rather than manual, labor.

Rise of global markets -- itself accelerated by information technology -- has hollowed out the once dominant U.S. manufacturing sector and reoriented the U.S. economy toward the service sector. The service economy also rewards the educated, with high-paying professional jobs in finance, health care, and information technology. At the low end, however, jobs in the service economy are concentrated in retail sales and entertainment, where salaries are low, unions are weak, and workers are expendable.

Observers of Globalization generally fall into one of two camps:

Champions of globalization portray these developments as the natural consequences of market forces, which they believe are not only benevolent (because they increase aggregate wealth through trade and make all kinds of goods cheaper to consume) but also unstoppable. 

Skeptics of globalization, on the other hand, emphasize the distributional consequences of these trends, which tend to confer tremendous benefits on highly educated and highly skilled elites while leaving other workers behind.

New Explanations: Public Policy

·         Public policies have concentrated and amplified the effects of the economic transformation and directed its gains exclusively toward the wealthy.

·         Congress has cut tax rates on high incomes repeatedly and has relaxed the tax treatment of capital gains and other investment income, resulting in windfall profits for the wealthiest Americans.

·         Labor policies have made it harder for unions to organize workers and provide a countervailing force to the growing power of business; corporate governance policies have enabled corporations to lavish extravagant pay on their top executives regardless of their companies' performance; and the deregulation of financial markets has allowed banks and other financial institutions to create ever more Byzantine financial instruments that further enrich wealthy managers and investors while exposing homeowners and pensioners to ruinous risks.

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The Takeaway:  Public policy really matters.