We’re Number 1! (In Inequality)


We have much to be proud of in America. But having the most economic inequality is one of our most dubious achievements. I guess we just have a very few people who are excellent happiness pursuers. Or maybe it’s something else entirely:

Now, all societies are unequal, but some are more unequal than others. The question is why the U.S. has become more so than just about any other rich country the past 30 years. After all, if rising inequality is mostly about universal factors like technology and globalization, we would expect the rise of inequality to be, well, universal. It hasn’t. As you can see in the chart below from a new paper by Facundo Alvaredo, Anthony Atkinson, Thomas Picketty, and Emmanuel Saez (AAPS), the top 1 percent have risen and risen in the U.S., but have only just risen, if that, most everywhere else. How’s that for exceptionalism?


The more taxes fell on the rich, the more the rich made before taxes. And it’s not clear why. It could be that the rich work more when they get to keep more of what they earn. Or it could be that they negotiate for more. Or that lower taxes mean less tax avoidance.

Or it could be something other than taxes. As the authors point out, the same political currents that brought top marginal rates waaay down also brought regulation down. And that was a perfect storm for Wall Street. Policymakers let banks get into old markets they’d been banned from before, and refused to regulate new markets — hello, derivatives — they would have been banned from under the old regulatory regime. And just like that, the universe had found its masters.

So how exactly does that work? It ain’t brain $urgery:

Imagine a box. It’s a comfortable box, luxurious even, but a box nonetheless. That’s where the top 1 percent lived before 1980. That’s where the postwar system of high taxes and a highly-regulated economy put them — and kept them. But this postwar system hit a wall in the 1970s. Ever-increasing inflation and overseas competition forced policymakers to ditch the old ways. And ditching the old ways took apart that box, piece-by-piece. That’s where the feedback loops between politics and economics really took off.

See, policymakers started dismantling the box out of necessity — but then they kept doing so, because the top 1 percent wanted them to. Tax cuts and deregulation helped the rich more than the rest, and then the rich used that money to lobby for even more tax cuts and deregulation. And on, and on it went.

Now I keep hearing from various quarters of the poli-sci world that politics are a sort of entertainment construct that aren’t inherently meaningful. Instead, what matters is the state of the economy (or an external threat.) This report indicates that’s more of a chicken and egg question. Or, as the author puts it:

In other words, Bill Clinton had it wrong. It’s the politics, stupid.