THE BLOG
04/24/2014 06:02 pm ET | Updated Jun 24, 2014

Oligarchy and Democracy in America

Oligarchy has always seemed far away to Americans. We readily invoke the term for Russian billionaires or robed senators in ancient Rome. But that is changing as we grapple with extreme economic and political inequality much closer to home.

It is axiomatic that money is power. The degree of oligarchy in a society depends on how concentrated wealth is in a few hands, and how easily wealth power can be converted into political power.

Surprisingly, the U.S. data on stratification makes us look worse than ancient Rome. The 500 wealthiest Roman senators were roughly 10,000 times as rich as the average person in the empire, who happened to be a landless farmer or a slave.

Each of the 500 wealthiest Americans is about 20,000 times as rich as the average person in the bottom 90 percent. If we focus only on financial resources, the average American in the top 500 has 40,000 times the wealth power of the median citizen.

This means that the richest Americans have between two and four times the relative money power of their oligarchic counterparts in the Roman empire. But can they convert wealth into effective political power?

In ancient times, wealth was often illiquid. Roman and medieval oligarchs claimed vast tracts of peasant farmland. They also had some gold, silver, or jewels. Most importantly, they had to be armed and rule directly to defend their wealth, often from other oligarchs.

Today, most wealth is financial and far more flexible. Ownership is guaranteed by governments rather than by castles and militia. Modern oligarchs do not need to be armed or hold government office. Instead, it is enough to use wealth for wealth's defense.

But defend against what? The dilemma for modern oligarchs is that the same government that protects property rights can also "take" wealth through progressive taxation and redistribute it as social programs. Democracies compound the problem because great majorities with great needs and tiny minorities with great resources all get one vote each.

The expression of oligarchy and democracy in America has shifted with the balance between wealth power and participation power. A key struggle throughout US history has been whether or not the society's resources would be mobilized to expand access and opportunities across the population, and who would pay for it.

It was participation power that pushed Congress to pass the first non-war Federal income tax in 1894. Exempting almost everyone except the very rich, the tax affected only 0.1 percent of citizens. Defeated in the legislature, American oligarchs responded by using wealth power to hire a phalanx of lawyers to challenge the tax all the way to the Supreme Court. In a 5-4 decision, it was struck down as a "communistic threat."

Democratic forces responded by changing the rules. It took eighteen years to mobilize enough participation power to pass the Sixteenth Amendment making the Federal income tax constitutional. Everyone except the top one percent was exempt.

Across the twentieth century, U.S. oligarchs used money power to fight back against this tax, especially as the New Deal threatened yet more social programs for the poor. The strategy had two prongs: attack redistributive government programs as unfair and un-American, and shift the tax burden off the rich and onto everyone else in society, which helped turn more people against the programs.

Oligarchs won major victories. Tax brackets were compressed and the highest tax rates were dramatically reduced. The biggest losers were the "mass affluent," who had enough money to get taxed, but not enough financial firepower individually to wage an effective wealth defense campaign.

With the decline of unions since the 1970s, the participation power of working-class Americans has eroded. Nothing like the popular victories of 1894 or 1913 are imaginable today.

Meanwhile, the potency of wealth power in American politics has increased. As democratic politics have moved from the stump to the airwaves, the cost of campaigns has exploded. And they are overwhelmingly financed by the rich, particularly during the primaries when the choices are narrowed and the agenda gets set. In 2012, we watched a single billionaire keep presidential hopeful Newt Gingrich running for months.

In the end, ordinary Americans still get to vote. But their choices are vetted via a wealth primary (with $30,000 a plate dinners) that starts long before ordinary citizens hear about candidates or issues.

The Supreme Court has facilitated the conversion of money power into political influence by removing limits on the flow of funds into campaigns and equating the use of money to free speech. This gives a handful of Americans up to 40,000 times the "money voice" of their fellow citizens.

My colleagues Ben Page at Northwestern and Marty Gilens at Princeton just produced a study showing that the average citizen has "near-zero" influence over policies the rich care about most.

The daily interplay of oligarchy and democracy in America does not end there. Since the 1960s, a sophisticated Wealth Defense Industry has arisen to further shield the ultra-rich from taxation and redistribution.

American oligarchs use their wealth power to fund conservative think tanks that have transformed the estate tax into the "death tax," and amplified messages like "government is the problem." Oligarchs also hire armies of tax lawyers, accountants, lobbyists, and wealth management specialists to create complex "tax products" and shelters, and to relocate fortunes to secrecy havens scattered around the globe.

This offshore financial dark matter is estimated to be between $5 trillion and $25 trillion, and it is mostly untaxed. The portion of these hidden riches belonging to Americans costs the U.S. treasury $80 billion annually in lost taxes.

The question is not whether America is a democracy or an oligarchy. It has always been both. What changes over time is the relative influence of participation versus wealth power. And in recent decades, policy changes have given wealth power the upper hand.

Americans tolerate enormous differences in wealth. But they also believe in one person, one vote. The easy conversion of wealth power into political power corrupts this fundamental principle.