Notes on income inequality

A bit later today, I’m heading over to the Government Accountability Office to give a talk on income inequality. Here are my notes:

- What are we worried about, exactly? The incomes of the top one percent? The income of the top 0.1 percent? The incomes of the 25th and 50th percentiles? The gap between the rich and the poor? The gap between the rich and the middle?

- It’s very possible these are different problems. Median wages stagnate in the 70s. Incomes at the top take off in the 80s.

- It’s also possible that they have different solutions. You’re probably worried about stagnating median wages because you think median wages should be higher. That argues for policies that somehow boost incomes in the middle. Separately, you may worry about the incomes of the rich because it gives them extraordinary political power. But that might argue more directly for policies that reform the campaign-finance system than it does for, say, a higher capital-gains tax rate.

- Political power probably should worry you. Martin Gilens, a political scientist at Princeton University, has been collecting the results of nearly 2,000 survey questions reaching back to the 1980s, looking for evidence that when opinions change, so too does policy. And he found it—but only for the rich. Policy changes with majority support didn’t become law except when that majority support included voters at the top of the income distribution. When the opinions of the poor diverged from the opinions of the rich, the opinions of the poor did not appear to matter. If 90 percent of the poor supported a policy change, its chances of passage were no better than if 10 percent of the poor supported it.

- Policy probably plays a role here. Germany, France, Japan, the Netherlands, Sweden and Switzerland have seen almost no rise in inequality. Australia, Canada, Ireland and the UK have seen a rise in inequality, but only half of what the United States has seen.

- I don’t find everything in Jacob Hacker and Paul Pierson’s ‘Winner-Take-All Politics” persuasive (review here), but the importance of policy “drift” should not be underestimated. They argue that what we don’t do in American politics is often as or more important than what we do do. If politicians used to vigilantly pursue increases in median wages and more economic equality and they have since stopped, you could see widening inequality and stagnating median wages even though no policy changes specifically led to that trend. Rather, the problem was that there weren’t policy changes enacted in response to that trend.

- Drift increases as political paralysis increases. And political paralysis has increased as parties have become more ideologically unified and procedurally disciplined. Rules that once helped forge consensus now lead to paralysis. There were more filibusters in the 110th Congress than in the 50s, 60s and 70s combined.

- That said, we could eliminate drift tomorrow and then do...what? Making the tax code more progressive would help. So would more aggressive health-care reform. But consensus breaks down after that. Unions? Trade policy? Education reform? It’s much easier to limit after-tax compensation for the rich than raise pre-tax compensation for everyone else.

- This is not a stable equilibrium. Particularly if median wages don’t pick back up and the political system doesn’t improve its capacity to respond. Tea party and Occupy Wall Street are signs of political stress. If we don’t get growth — and I mean growth for everybody — back on track soon, they’re just the beginning.