Government Policy and Income Inequality Yet Again

Andrew Samwick thinks about mechanisms through which "conservative" economic policy might lead to a significantly more unequal pre-tax income distribution:

Vox Baby: Show Me the... Mechanism: Krugman argues that the dominant political ideology is the main cause of changes in inequality. I want him to show a mechanism.... Others in Brad's recap have speculated about such mechanisms. There are a few different groups of them. Here's my quick take on them:

1) Weaker bargaining positions for labor, exacerbated by government policy.... Interesting idea. I think it's plausible.... [W]e've got to insist on a better comparison before assessing their importance.

2) Tax policy leading to higher pre-tax incomes disproportionately at the high end.... I don't think this is a valid explanation of some fundamental economic shift. It is a criticism of using reported income, rather than accrued income, to compare income distributions at different points in time.

3) Tax policy leading to higher pre-tax incomes disproportionately at the high end.... This one comes from Matthew Yglesias.... When you have a very progressive rate structure, an employer can get a lot more bang for his buck by directing his employment budget at middle-income people.... I think that's fascinating. I hadn't fully appreciated that a progressive tax system might be used to give lower-income workers a leg up in competing for the marginal unit of production. It remains an empirical question as to how important this might be.... I would have thought the effect to be small, compared to things like increasing global competition in product markets.

4) Lax enforcement of laws that should prevent the rich from stealing from others: This group is basically organized around the notion that CEOs and other top corporate officers have seen their pay grow tremendously over this period, and some of that, the theory goes, must be due to illicit activities. Hard to argue that none of it is ill-gotten, though I am not in the camp that suggests it is very high...