Did the decline of the American middle class “just happen” or is it political?

Alan Blinder pretty accurately describes the dystopian changes for the American middle class in the last third of a century in Our Dickensian Economy. Wall Street Journal online, December 17, 2010 (pay wall). I didn't find anything to disagree with except this statement in the middle:

Starting in the late 1970s, the labor market turned ferociously against those with less education and in favor of those with more. This was not Ronald Reagan's fault, nor George Bush's (either one), nor Mitch McConnell's. It just happened.

Emphasis added. It "just happened?" Not according to Jacob Hacker and Paul Pierson in their new book Winner-Take-All Politics: How Washington Made the Rich Richer—and Turned Its Back on the Middle Class, reviewed in Foreign Affairs by Robert Lieberman. From the review:

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. Simultaneously, the 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.

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 a highly educated and highly skilled elite while leaving other workers behind. But neither side in this debate has bothered to question Washington's primary role in creating the growing inequality in the United States.

IT'S THE GOVERNMENT, STUPID

Hacker and Pierson refreshingly break free from the conceit that skyrocketing inequality is a natural consequence of market forces and argue instead that it is the result of public policies that have concentrated and amplified the effects of the economic transformation and directed its gains exclusively toward the wealthy. Since the late 1970s, a number of important policy changes have tilted the economic playing field toward the rich. 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.

. . . .

The dramatic growth of inequality, then, is the result not of the "natural" workings of the market but of four decades' worth of deliberate political choices. Hacker and Pierson amass a great deal of evidence for this proposition, which leads them to the crux of their argument: that not just the U.S. economy but also the entire U.S. political system has devolved into a winner-take-all sport. They portray American politics not as a democratic game of majority rule but rather as a field of "organized combat" -- a struggle to the death among competing organized groups seeking to influence the policymaking process. Moreover, they suggest, business and the wealthy have all but vanquished the middle class and have thus been able to dominate policymaking for the better part of 40 years with little opposition.

Hacker and Pierson are by no means alone in saying that political influence is critical to economic success. For example, Kevin Phillips argues persuasively that this is not a recent phenomenon but that over several centuries here and abroad the growth of new industries and new fortunes has depended more often than not on government largess and protection than on laissez-faire policies, individual initiative, investment and risk taking. Wealth and Democracy: A Political History of the American Rich. In investment terms, spending money on campaign contributions and lobbyists may have a much bigger payoff than equivalent spending on R&D, plant & equipment, human capital, financial engineering, or any of the other traditional types of investment to increase the stock price.