Economic Inequality in the US: It’s Policy, Stupid!

I’m reading an interesting paper that just appeared in a special issue of the Journal of Economic Perspectives from the American Economic Association.

“The Top 1 Percent in International and Historical Perspective” from Alvaredo et al. tracks the share of income held by the top 1% of a number of countries and finds what we already knew. Since the 1980’s, the share of income held by the top 1% has been on the increase and is reaching levels not seen since before the Great Depression.

Though globalization, technology and a fundamental change in how the top earners make money (finance vs. investment in manufacturing) are often implicated and seen as merely an unfortunate side effect of development, Alvaredo argue that increasingly regressive taxation structures are the culprit.

Further, they argue that the end of unions and the determination of wages through collective bargaining have tipped the scales against bottom level wages earners, increasing the share of the pie taken by the very wealthy.

Top tax rates have moved in the opposite direction from top pre-tax income shares. The second factor is a richer view of the labor market, where we have contrasted the standard supply-side model with the alternative possibility that there may have been changes to bargaining power and greater individualization of pay. Tax cuts may have led managerial energies to be diverted to increasing their remuneration at the expense of enterprise growth and employment. The third factor is capital income. In Europe—but less so in the United States—private wealth (relative to national income) has followed a spectacular U-shaped path over time, and inherited wealth may be making a return, implying that inheritance and capital income taxation will become again central policy tools for curbing inequality.

Of course, it’s not like most of us didn’t know this already.

Whether or not a very wealthy class becoming wealthier relative to everyone else is good or bad for society is a topic up for debate. The trouble, however, is that mass inequality give a small sliver of the population greater political power, which they can use to influence policy, to realize a limited number of self interested goals.

But we knew that already…..