There's a fun argument rushing through some blogs today sparked by a Paul Krugman column on the government's impact on inequality. Krugman argues that the correlation between conservative and progressive political periods and rising or lowering inequality is too powerful to ignore. "it seems likely," he writes, "that government policies have played a big role in America’s growing economic polarization — not just easily measured policies like tax rates for the rich and the level of the minimum wage, but things like the shift in Labor Department policy from protection of worker rights to tacit support for union-busting. Brad DeLong disagrees, saying that "the shifts in income inequality seem to me to be too big to be associated with anything the government does or did." And Matt Yglesias disagrees with Brad, saying "The trend data is too striking to be ignored. If you have a phenomenon and are having trouble identifying the cause, the thing to do is to try harder to identify the cause, not assert that the phenomenon isn't happening."
Let's start here with what the trends in inequality actually look like. Here's a graph tracking the gini coefficient -- the standard measure of inequality -- over the 20th century. The higher the coefficient, the more inequality:
Okay. Now, the problem Paul and Matt are having is that nothing the government actually does looks able to generate such wild swings in wealth distribution. That's why Brad won't buy their argument, though he doesn't provide an accounting of what does account for the shifts.
Seems to me we have a causal problem here. Politics, after all, tends to follow societal trends, not the other way around. So during periods when conservatism is ascendant across the country, conservative politicians will win elections. But it's probably the grassroots sentiment, not the legislation, that accounts for much of the difference in income distribution. During these periods, support for unions (and thus their strikes), will weaken, pressure on corporations to ensure wages keep pace with productivity will essentially evaporate, CEO pay will skyrocket, etc and so on. These trends aren't created by the regime in Washington, but they're enabled by conservative politicians who won't attempt a governmental correction, and preserved by a populace that, for whatever reason, is unwilling to take a populist turn.
Eventually, though, that changes, and corporations have to react, and unions win some strikes, and the general trend is towards higher salaries and better benefits and whatever else, and during all this some progressives get elected to office, and so we assume it's all their fault, when all they did was raise the minimum wage fifteen cents. But because we can see which party controlled Congress easier than we can track societal attitudes, we tend to blame the shifts on political changes without knowing exactly why.
