There have been political changes in the US that allow the extreme high end to garner more wealth. Ultimately, it represents a failure of our society to take account of the fact that the extreme high end can lobby and can organise for its own interests, and we’ve let it happen.
You might think that in a system of majority voting, the middle class and the poor would dominate and would prevent this kind of inequality from developing. But it hasn’t been that way – it’s been even less so that way lately, especially in the US.
Shiller doesn't give concrete examples, so allow me to list a few.
1) Wall Street bankers, through their lackeys Hank Paulson and Ben Bernanke, threaten Congress with the end of the world if the banks don't get bailed out. The banks get bailed out.
2) Wall Street bankers insist that the American economy can't be competitive unless Wall Street banks remain Too Big To Fail. Financial reform is gutted and banks are allowed to become even bigger.
3) Even after the bailouts, banks remain insolvent, so bankers lobby for accounting rule changes that allow them to hide their insolvency. Banks get their accounting rule changes.
4) Even after the accounting rule changes, banks are still in terrible financial shape. So the Federal Reserve pins interest rates at zero percent so that the banks can generate giant profits by borrowing at zero percent and buying Treasury bonds.
Et voila! You have more obscene profits and bonuses on Wall Street just two years after Wall Street corruption and incompetence blew up the American economy. At the same time, Main Street still suffers with stagnant wages, high unemployment, and rising food and energy costs.
"Let them eat credit." Indeed.
Liberals always paint this as an issue of tax policy and campaign finance reform. But that is a naive view. Where there is money and power, it will find influence. The Wall Street - Washington cabal is far too deep and intertwined to be restrained by campaign finance rules, and they will always find a way to push the burden of higher tax rates onto the middle class while buying loopholes for themselves. The revolving door between Wall Street and Washington is far more pernicious than any campaign contributions. Hank Paulson was a Wall Street multi-multi-millionaire before he came to the Treasury and used his position to bail out his Wall Street buddies. And Timmy the Tax Cheat knows that he'll have a seven-figure Wall Street job waiting for him as long as he does Wall Street's bidding as Treasury Secretary. That kind of giant personal wealth incentive makes any campaign contributions seem quaint by comparison.
I simplify this somewhat by focusing on Wall Street, but the same principle applies obviously to government contractors, ethanol makers, TSA nudie-scanner makers, and every other industry funded, subsidized, or mandated by politicians handing out Other People's Money. Every department of the government is filled with bureaucrats at every level hoping to get rich by doing favors for, and then landing a cushy job with, private industry.
The answer was set out for us by the Founding Fathers in the Constitution. Only restraints on the scope and breadth of what the government can do will prevent the rich and powerful from seizing the levers of government for their own advantage. The government our Founding Fathers gave us was never supposed to be allowed to bail out private banks or manipulate interest rates for the benefit of the wealthy. The way to restore representative democracy and reduce government-sponsored inequality is to restore limited government.