Semi-Daily Journal Archive

The Blogspot archive of the weblog of J. Bradford DeLong, Professor of Economics and Chair of the PEIS major at U.C. Berkeley, a Research Associate of the National Bureau of Economic Research, and former Deputy Assistant Secretary of the U.S. Treasury.

Sunday, August 20, 2006

The Primacy of Politics for Income Distribution?

The problem that I have with Paul Krugman's argument here is that the shifts in income inequality seem to me to be too big to be associated with anything the government does or did. Yes, Roosevelt and company were pushing in the right direction. Yes, Reagan, Gingrich, Bush, and company have been pushing in the wrong direction. But what they did and do affects (I think) after-tax income inequality much more than the before-tax income inequality numbers, and the before-tax numbers show the trends remarkably strongly. And I can't see the mechanism by which changes in government policies bring about such huge swings in pre-tax income distribution.

Wages, Wealth and Politics - New York Times: By PAUL KRUGMAN: Recently, Henry Paulson, the Treasury secretary, acknowledged that economic inequality is rising in America. In a break with previous administration pronouncements, he also conceded that this might be cause for concern. But he quickly reverted to form, falsely implying that rising inequality is mainly a story about rising wages for the highly educated. And he argued that nothing can be done about this trend, that "it is simply an economic reality, and it is neither fair nor useful to blame any political party."

History suggests otherwise. I've been studying the long-term history of inequality in the United States. And it's hard to avoid the sense that it matters a lot which political party, or more accurately, which political ideology rules Washington. Since the 1920's there have been four eras of American inequality:

  • The Great Compression, 1929-1947: The birth of middle-class America....
  • The Postwar Boom, 1947-1973: An era of widely shared growth....
  • Stagflation, 1973-1980: Everyone lost ground....
  • The New Gilded Age, 1980-?: Big gains at the very top, stagnation below. Between 1980 and 2004, real wages in manufacturing fell 1 percent, while the real income of the richest 1 percent -- people with incomes of more than $277,000 in 2004 %u2014 rose 135 percent.

What's noticeable is that except during stagflation, when virtually all Americans were hurt by a tenfold increase in oil prices, what happened in each era was what the dominant political tendency of that era wanted to happen. Franklin Roosevelt favored the interests of workers while declaring of plutocrats who considered him a class traitor, "I welcome their hatred." Sure enough, under the New Deal wages surged while the rich lost ground.

What followed was an era of bipartisanship and political moderation; Dwight Eisenhower said of those who wanted to roll back the New Deal, "Their number is negligible, and they are stupid." Sure enough, it was also an era of equable growth.

Finally, since 1980 the U.S. political scene has been dominated by a conservative movement firmly committed to the view that what's good for the rich is good for America. Sure enough, the rich have seen their incomes soar, while working Americans have seen few if any gains.... Bill Clinton was president for eight years. But for six of those years Congress was controlled by hard-line right-wingers. Moreover, in practice Mr. Clinton governed well to the right of both Eisenhower and Nixon.

Now, this chronology doesn't prove that politics drives changes in inequality. There were certainly other factors at work, including technological change, globalization and immigration.... But it seems likely that government policies have played a big role.... And if that's true, it matters a lot which party is in power -- and more important, which ideology...

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