Kellogg School of Management at Northwestern University
Insight Blog

Jun 3, 2015

Drawing the Link Between Money and Political Polarization

In the last decade, two trends have received a great deal of press: income inequality and political polarization. The first of these has been well established by scholars like Thomas Piketty, author of the best seller Capital in the Twenty-First Century. Meanwhile, political scientists worry that inequality may be linked to increased polarization within the U.S. House of Representatives, leading to policies that favor only the wealthiest Americans. But until now there has not been a theory that would explain the connection between income inequality and political polarization.

According to Timothy Feddersen, a professor of managerial economics and decision sciences at the Kellogg School and a newly elected member of the American Academy of Arts and Sciences, income inequality and political polarization are linked by two factors: the importance of money in politics and the way the wealthy and everyone else increasingly want different things from our political system. In a recent paper, Feddersen and his coauthor Faruk Gul find that polarization may stem from the fact that political parties must win support from both voters and donors. They also find that if election outcomes impact the distribution of wealth—and thereby the political preferences of donors—income inequality and political polarization will remain tightly linked over time.

Their finding raises troubling questions about the ability of democracy to respond to voter preferences. In a perfect democracy, the candidates whose policies best represent the voters would emerge victorious, and winners would govern according to the interests of those who elected them. “The truth is that voters aren’t the only players in the game,” Feddersen says. “In our model, we make the assumption that in order to win elections, candidates need support from donors as well as support from voters.” Given that wealthy donors tend to support policies that do not reflect the interests of most voters—favoring instead policies that benefit themselves and others like them—campaign contributions have a polarizing effect on political outcomes. “The focal point is no longer the median voter,” he says. “The focal point is now somewhere in between the median donor and the median voter.”

This gap between voters and donors creates uncertainty for the parties, and their response to this uncertainty is to move away from the center and towards policies favored by partisan extremes. “It’s not that parties are uncertain about the policy preferences of voters or donors. Rather the parties are uncertain about the relative importance of voters and donors. As the gap in preferences between voters and donors grows, this uncertainty becomes more salient.”

“There’s a tension there,” he says. “The only way we have found to explain the connection between income inequality and political polarization is via money in politics. Our model provides support for the idea that money in politics distorts political outcomes.”

The model also supports the idea that there is, indeed, a feedback cycle in politics that can exacerbate both income inequality and polarization. However, Feddersen notes that this same feedback cycle is also capable of reversing itself. As policies are enacted that reduce income inequality, voter and donor preferences are increasingly aligned, reducing polarization and making election outcomes more responsive to voters.

Such cycles are observed in U.S. history as inequality and polarization ebb and flow over the years; in part, this is the nature of the democratic process. While Feddersen’s work does not necessarily find that American democracy is broken, it does offer evidence of a deep structural problem.

“I think most people believe that money matters in politics,” he says. “But they probably underestimate how much—just as they underestimate how much inequality there is.”

Feddersen, Timothy, and Faruk Gul. 2014. “Polarization and Income Inequality: A Model of Unequal Democracy.” Unpublished manuscript.

Photo credit belongs to Kool_skatkat. Published under a Creative Commons license.

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