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...

Comments

[Denis Drew]

Inequality in America starts with COMPLACENCY at the bottom -- I know because I live there. There is no overwhelming interest among the American workforce in any mechanism by which they could withhold their labor for a better deal. Yes, yes; polls show 50% would prefer to be in a union -- but there is no inexorable groundswell because there is fundamental understanding of the desparate need.

I very undramatically chalk it all up to an accident of culture: we have this belief in the self-reliant individual and no information to tell us otherwise (the great compression and decades of galloping productivity misinformed us otherwise).

I spent most all my working life -- from 1961 to about 2000 reading the current political books and mags and listening to all the talking heads and never picked up even a hint that, by now, 25% of workers are earning less than the minimum wage under Lyndon Johnson, $9.50/hour even though average income doubled since that same time -- or that middle and upper middle family income has grown half as fast as average income for over 30 years -- or that the missing growth has almost all gone to the top 1%.

Not that I blame the top 1% for doing what they are supposed to do in a capitalist economy: bargaining hard for the best deal.

The solution is for someone to alert the bottom to the money they are missing out on and on how easily they could recoup it by modernizing labor organizing legislation and then get out of their way. All so simple if somebody would just tell us.

[dale]

"technological change, globalization and immigration" are Paul's further explanation for growing inequality. No mystery there.

[Blissex]

«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.»

That sounds extraordinarily strange to me and worded far too strongly («anything»?).

Pre-tax income distribution shifting quite a bit in some countries but not others in the past 10-15 years depends on happenstance or productivity and not the overall political climate and the stance of governments?

«And I can't see the mechanism by which changes in government policies bring about such huge swings in pre-tax income distribution.»

Perhaps it is «policies» in general, including legal policy, not just economic policy.

The chambers of commerce and the business roundtable have been going on for decades about having a ''business friendly'' climate. Perhaps they are deluded fools and every time they spend a few millions to buy a legislator or a law here or there they are wasting it.

Certain small details, for example relating to the accounting treatment of options, seem to excite the sponsoring base of government quite a bit. Perhaps they are wasting time there too.

Reducing enforcement efforts for illegal immigration:

http://WWW.BusinessWeek.com/magazine/content/05_29/b3943001_mz001.htm
«The 1986 law forbidding their employment may still be on the books, but the feds have almost completely given up enforcing it [ ... ] the U.S. Immigration & Customs Enforcement agency brought just three actions against companies for employing illegals, down from 417 in 1999, according to the GAO. And only 2,300 of the country's 5.6 million employers used a computer system in 2004 to check employee Social Security numbers.»
http://LawProfessors.typePad.com/laborprof_blog/2006/06/the_job_magnet_.html
«Between 1999 and 2003, work-site enforcement operations were scaled back 95 percent by the Immigration and Naturalization Service, which subsequently was merged into the Homeland Security Department.
The number of employers prosecuted for unlawfully employing immigrants dropped from 182 in 1999 to four in 2003, and fines collected declined from $3.6 million to $212,000, according to federal statistics.
In 1999, the United States initiated fines against 417 companies. In 2004, it issued fine notices to three.»

does not send any signal at all... Neither does reducing antitrust effort to some sparse episodes:

http://WWW.ComputerWorld.com/hardwaretopics/hardware/story/0,10801,66102,00.html
«I can't leave my kids to Microsoft. The government won't fight the battle. The government won't enforce the laws.»

Small changes for example in the climate to make hostile and asset stripping takeovers easier can never be thought to have had gigantic ripple effects.

And never mind about small details like all but guaranteeing positive returns to management and investors:

http:/WWW.beearly.com/pdfFiles/PIMCO092005.pdf
http://WWW.PIMCO.com/LeftNav/Late+Breaking+Commentary/FF/2005/FF+September+2005.htm
«[6] I attempted to put a value on the Greenspan Put in the February 2000 Fed Focus, "Me and Morgan le Fay", writing that without the Put, the P/E for the S+P 500 should be 18, not 32.»

Perhaps the FOMC is not part of the administration, but it looks surely like part of the government to me.

[larry birnbaum]

Brad, I agree with Blissex above. There are a lot of "little" things the government has its fingers in that might affect income. I'd add to his list, a friendly vs hostile environment for organized labor. Minimum wage. Infrastructure investment. Public education. Etc. So I don't know which of these things have been trending which ways, but it seems unlikely to me that how they've been trending wouldn't have effects on income and income distribution.

[tom f]

To pile on, "technological change, globalization and immigration" can't be seperated from Federal (and state) policies any more than tax changes, undermining of regulatory agencies, and other fiscal, monetary, and legal regimes.

All of these display class bias.

[Blissex]

«Inequality in America starts with COMPLACENCY at the bottom»

Yes, this is something that has struck me quite a bit -- the ''let's bend over'' attitude of american workers.

The Economist has commented that this is due to something like 60% of Usians thinking that they will become rich before their retire, even if class mobility is actually quite low.

«polls show 50% would prefer to be in a union -- but there is no inexorable groundswell because there is fundamental understanding of the desparate need.»

Perhaps there is some, but then there is terror. Employers apparently rather dislike hiring ex-union workers. In the past unionization battles were sometimes fought with rifles and explosives (both sides) and like in other countries the Army was occasionally brought in to machine gun strikers.

Perhaps it could not happen again, but now that there are national databases, and big employers routinely refuse to hire people who don't have a perfect credit history nationally, it is hard to be the one who sets the ball rolling.

«I very undramatically chalk it all up to an accident of culture: we have this belief in the self-reliant individual and no information to tell us otherwise (the great compression and decades of galloping productivity misinformed us otherwise).»

I agree that this is a large part of the story; the business interests are marxian to a fault (they tend to believe in most of what Marx said, reserve labor army and all, just see it from the other side :->), and seem to have understood well the gramscian concept of ''cultural hegemony''.

But it is also because the unions at some point in the 70s-80s became widely perceived, and correctly, as exploitative and brutal guilds in their own right, and the left as a bunch of dreaming crazies.

There is a very nice book on the subject, "The right nation", by Micklethwait and Wooldridge.

The left and the union have dug themselves in a deep hole... Almost as deep as the right and the chambers of commerce dug themselves in the 1930s.

«[ ... ] never picked up even a hint that, by now, 25% of workers are earning less than the minimum wage under Lyndon Johnson, $9.50/hour even though average income doubled since that same time -- or that middle and upper middle family income has grown half as fast as average income for over 30 years -- or that the missing growth has almost all gone to the top 1%.»

Well, few people talk about these things because they know which side their bread is buttered on, and talking about these things means being classified as a promoter of the politics of envy or of class hatred.

«Not that I blame the top 1% for doing what they are supposed to do in a capitalist economy: bargaining hard for the best deal.»

Ah you see class warfare is when the bottom 99% want a bigger slice of the pie, but when it is the 1% doubling theirs that's justly rewarding higher productivity. :-)

«The solution is for someone to alert the bottom to the money they are missing out on and on how easily they could recoup it by modernizing labor organizing legislation and then get out of their way. All so simple if somebody would just tell us.»

But that would require going up against vested interests for the sake of a few dozen million poor suckers. :-)

To give you an idea of how dire the intellectual and practical situation is, some unions are trying to organize day laborers, but are afraid that their members would complain, which is beyond moronic:

http://SeattlePI.NWSource.com/business/281097_daylaborunion14.html
«However, Jerry Hunter, former general council for the National Labor Relations Board, said unionized construction workers might balk if their unions recruit illegal immigrants. "Members could start asking themselves, 'Whose interests are you representing?' " Hunter said.»

[Robert Waldmann]

I think prevailing ideology has direct effects in addition to affecting public policy. Heartened by the fact that you think you have discovered an intelligent sociologist (who is in fact a physicist) I'd say that social norms are critical, and that firms have to respect their workers perceptions of what is fair. It is no longer fatal to a firm for the top 5 officers to have incomes that you and I consider obscene. Thus such firms are not crippled by the anger of their other employees.

More generally I think the ideas that greed is OK and that grabbing lots of money demonstrates intelligence not corruption have become stronger resulting in increased inequality.

In a word Akerlof.

[PaulC]

I have no idea if Krugman is right, but it seems clear to me that the effect of government over long periods of time has the potential to be that significant.

First off, small effects often have multipliers, particularly in winner take all scenarios. E.g., in an olympic race, the runners are all excellent to begin with, with the actual difference in ability often fractions of a percent. But only a few get medals; they have some chance at fame. The almost-as-goods are forced back to their day jobs. I'm not saying this is a good model for the economy, but it just illustrates how even a small advantage can pay off disproportionately.

Second, if you look at government policy over time and conclude they're not doing much, I wonder what you're using as a baseline. Maybe it's only a radical government that lets inequality get out of hand by doing nothing, while a moderate one would consider it a disaster that needs action.

I think there are two premises (counter-premises) that need to be considered. One is the idea that growing inequality is socially disastrous (a normal, natural situation). The other is that private wealth in a growing economy can be tapped up to a limit for public good (is absolutely sacrosanct and should only be touched as sort of a necessary evil for supporting some minimal governmental duties--e.g. defense and law enforcement).

If you look at these premises and ask what a government would do in response to trends over a long period of time, I think it is reasonable to consider that a government with conservative premises would let inequality get out of hand, while one with liberal premises would be able to change the outcome using proportionately small changes assuming multipliers.

[Blissex]

«Small changes for example in the climate to make hostile and asset stripping takeovers easier»

Perhaps I have mentioned this already, but I think Milken and Drexel have had a far greater influence that I thought.

When debt fueled hostile takeovers were rare, management had long term careers and their self interests were to pursue corporate empire building.

Now that it is easy and cheap to fund with debt a takeover, management self interests are to make as much money as possible as possible in as short time as possible.

Their profile has switched from a long term to a short term sharecropper, and now they work the assets they are temporarily leasing a lot harder. Which is not in the interests of shareholders either. But the incentive is there.

While Milken was the enabler of the asset stripping fashion, perhaps they were not the ultimate cause; I suspect the increase in takeovers was largely based on reductions in capital gains tax, which also gave an incentive to corporations to stop distributing dividends and gross up the capital value of the company, via ''virtual'' earnings.

[Blissex]

«It is no longer fatal to a firm for the top 5 officers to have incomes that you and I consider obscene.»

Good example, but there is an even bigger one: that unlike 2-3 decades ago it is unremakable and fair game when very profitable employers fire employees to increase those profits.

[Tom Marney]

"The Economist has commented that this is due to something like 60% of Usians thinking that they will become rich before their retire, even if class mobility is actually quite low."

I vividly remember when that poll was released. In addition to the alarming nature of the actual findings, what struck me was how the right wing press greeted them as being wonderful news, that gross and widespread ignorance by the public was, in their view, a Good Thing. Conversely, I saw little or nothing about this from the left wing commentariat, as though the truth about how clueless Americans are was simply too appalling to acknowledge.

[Graydon]

Brad --

The kicker is what kinds of corporate organization are permitted, not tax policy. The relentless push for de-regulation and for restructuring law related to markets has converted a machine intended to secure the general prosperity into a machine to concentrate wealth. (This started around 1970, with the creation of the formal obligation for a corporation to maximize monetary returns to the exclusion of all other considerations.)

Organizational patterns and structures matter. Tax policy is not even vaguely important compared to, frex, what banks are allowed to do, and that is often both governmental and policy set by non-legislative means.

The general conflation of wealth and virtue isn't any help, but the core problem is that profit is *legally* regarded as an excuse to do almost anything.

[Dean Baker]

Brad,

Anyone who wants to attribute the growth in pre-tax income inequality to the birds and the bees (i.e. the natural workings of the market) has a strong hurdle to overcome in explaining why Europe has not seen a similar growth in inequality. (It's productivity growth and EPOPs are not that different from the U.S., so don't try a "failed Europe" story.)

There are a large number of ways in which the government sets policy that determines whether income flows upward or downward. For example, Bill Gates is the richest man in the world because the Bush I-Clinton administrations allowed him to pursue blatant violations of anti-trust law in order to gain a near monopoly on the market for operating systems.

Of course, patent and copyright monopolies come from the government, not the market. The fact that the U.S. gives drug companies patent monopolies, and then lets them charge whatever they like for their drugs (unlike Europe, which has price controls), makes shareholders in drug companies and their top execs very rich, and everyone else somewhat poorer.

The rules of corporate governance are also set by the government. (Remember, corporations are creations of government, not nature.) In the U.S., top executives have abused their positions of power to write themselves huge paychecks. This has brought no response from the government to adjust the balance of power between top execs and other stakeholders.

Finally, the U.S. has quite consciously pursued a trade and immigration policy that is intended to put downward pressure on the wages of the bulk of the workforce, while protecting doctors,lawyers, and other highly paid professionals (including economists).

I think a very compelling case can be made that the upward redistribution of before tax income was the result of conscious policy, not an accident of nature.

[PaulC]

Or to recast my previous comment as a metaphor (with unfortunate allusions to the movie Being There, but so be it) suppose I am observing two gardens: one apparently well-maintained and productive, the other overgrown with crabgrass and dandelions. I might conclude that whatever happened isn't the gardener's doing. They both planted roughly the same crops, used the same fertilizers, watered them about as much. The plots were similar in size and received the same amount of sunshine. Whatever happened is the result of some mysterious external factors.

When pressed, I might add that in fact the gardener with the better results did something else, spending a little extra time each day pulling out some plants. But they were just little seedlings, barely noticeable. If were to weigh the mass of weeds against those seedlings, it would be clear to any reasonable person that there is simply no way that those small actions could account for the difference between these gardens.

[rootless]

My first inclination (as a lifelong union member and off-and-on union activist) is to agree that indeed, government policies that favor union organizing ("President Roosevelt Wants You to Join the Union," said CIO billboards after the Wagner Act was passed), or obstruct it (if only by looking the other way when employers commit unfair labor practices) make a big difference in pre-tax income inequality. But why not look at the data? Could we track the inequality changes (say by using the Gini Index) on a timeline for comparison with union participation rates, union or employer victories in representation elections, strike activity, and maybe other measures of labor strength? And then let's plot these curves against the unemployment rate, too.

[anne]

http://krugman.page.nytimes.com/b/a/257971.htm

August 18, 2006

The Income Gap Is Real

Paul Krugman: There are real questions about just how closely supply and demand determine wages; the labor market isn't just like the market for wheat. Also, there's a lot of evidence that unions have a large effect on the wages of non-union workers, too. When you're in an economy in which about a third of private-sector workers are unionized, as was true of the United States when I was growing up, even non-union employers tread carefully, for fear of giving their workers a strong incentive to organize. When you're in an economy where unions have been largely banished from the private sector, as is the case now, things are very different.

Just a note for the truly wonkish among my readers: why did I use the particular statistics I did? The answer is data availability.

If you're only looking at the last few decades, you can use a number of measures of income inequality; that's because these days the federal government carries out surveys that yield a lot of information about who earns what. But I wanted to take a longer sweep, and the surveys didn't exist before about 1947 at the earliest.

What we do have, however, are data on manufacturing wages, collected by pioneering economic statisticians, and data on the income of the richest Americans, collected as a byproduct of the income tax, which was introduced -- but only for the rich -- in 1913. In modern data, the difference between growth in manufacturing wages and growth in the income of the top one percent closely tracks more comprehensive measures of inequality. And using that comparison I can extend the discussion back far enough to cover the great equalization of income that took place under the New Deal.

And that's important. I think the story of how income gaps narrowed under F.D.R., stayed relatively modest for several decades, then returned to Great Gatsby levels of inequality over the last quarter century, is the key to understanding a lot of what happened to America. So we really need to learn from the past, and not assume that the way things are right now is the way they have to be.

[Bruce Wilder]

". . . 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."

A lot of others have made important points.

Like many others, I see vast arrays of government policies, which affect the distribution of income and wealth.

One of the biggest phenomena visible in the data is the "hollywoodization" of corporate executive compensation. Maybe, you don't know the details of changing rules on corporate governance. I certainly don't, though I know they have changed, and that they affect how effective even major stockholders can be in exercising some degree of oversight. Nor, absent a lot of careful, methodological thinking, would I have an opinion on the degree to which general norms or detailed rules are responsible for the huge increases in corporate executive compensation.

I do note that Labor costs have risen at an average rate of 1.5% over the past 15 years, but prices have risen at an average rate of more than 2%. Small changes do magnify.

I also remember things. I remember the Reagan deficits and the Volker squeeze and the resulting expansion of the value of financial assets. I remember the Saving & Loan bailout, which was a huge transfer of wealth.

[jerry]

Don't misunderestimate the effects of jawboning, the bully pulpit and the creation and maintenance of a collusive environment.

In the great society, there was a great pressure on company owners and CxOs to act in socially progressive.

Since Nixon there has been a battle on the affirmative action, unions, minimum wage etc. Parts of this battle is jawboning from the government of the day, and friends of the court actions.

In short, the memo is issued, and acts not just in post-tax manners but through the statements and sentiments of the executive in charge.

What did the Chimp do in post tax policy to encourage post-dating of stock options? Nothing, yet all the of Big N accounting firms knew to advise their clients now was the time to implement that little piece of corruption.

And for the past 25 years, America has been outsourcing friendly, not due entirely to H1-B visa actions, but to the statements of the Presidents and sadly the econocrats as well (looking at both you and Paul, though Paul has since recanted and become reeducated.)

[Bruce Wilder]

I so want to write a lengthy rant, but Brad gives me nothing to rant against.

What is the basis for this "judgement" over whether the magnitude of the "before tax" swings are "too large" to be explained by political choices?

What does he think determines income distribution? What class of explanations are available, which allow for large, apolitical changes? What are the variables, what are the parameters?

If Brad had some kind of theory of production, which was not completely flaky, there would be a framework for analysis discussion on the table.

alas, for want of a nail, a shoe, a horse and a kingdom, no rant.

[eyelessgame]

I think the changes in tax policy may well have driven corporate compensation policy. Townsend's book 'Up The Organization', written in 1970, in arguing (to CEOs) against high salaries for themselves, pointed out something to the effect of "It's not as though you get to keep the money anyway. You're just a conduit for the money to go from company profits to the IRS."

Anecdotal. Merely worth, I think, some investigation (if it's possible to do so) on whether salaries really were held down partly because it simply wasn't worth it, in the days of the 70% tax bracket, to raise the CEO's pay by $100K just so he could pay $70K more in taxes.

[Rebecca Allen, PhD, ARNP]

I think you're right--and Krugman acknowledges this also--that other trends besides governmental policy are at work here. However, for me the fact that there are trends that favor inequality strengthens the argument that the government should be working in the OPPOSITE direction, so that inequality doesn't get out of hand. Instead, as Krugman points out, we've had governments that want to accelerate these inequality-encouraging trends, not rein them in.

[Laurent GUERBY]

To cite Piketty & Saez 2003 paper conclusion:

"our proposed interpretation also suggest that the decline of progressive taxation observed since the early 1980s in the USA could very well spur a revival of high wealth concentration and top capital incomes during the next few decades."

No effect of tax policy? It looks like those who looked hard at the data think otherwise, no?

[Adrian]

Pre-tax capital income is, don't forget, a yield on previous years' after-tax income. (Including inheritances.)

[Jacobo]

Jerry's probably on the right track. It's not so much legislatively-enacted policy as it is the philosophy of leadership: Actors operating in an environment of social responsibility, as created by Roosevelt, would in all likelihood behave very differently than those operating in an environment of winner-take-all, as with recent Republican Presidents. The general concept of "Great Expectations" works not only for specific policies (see, e.g., Eggertsson 2005 [FRBNY]), but for an entire atmosphere.

[gorobei]

Brad says: And I can't see the mechanism by which changes in government policies bring about such huge swings in pre-tax income distribution.

Well, if the main swing in pre-tax income distribution is between the top 1% versus the other 99%, I've got a few ideas...

1) Deferred compensation plans. Tax rates a bit high right now? Just defer 20% or more of your income - a good plan lets it grow tax-free. Think a 401K on steroids. Keep rolling the deferred amount until you retire or a tax change opens up a window for you to realize the income.

2) Custom pension plans. These beauties were (are?) unreported and untaxed at grant time. Tax rates too high right now? How about a defined benefit when you retire, maybe free (and tax-free) healthcare for life?

3) Various private partnership vehicles that paid in long-term cap gains, not income. Idea is simple: if options make an executive perform, surely making him risk his own money should make him perform even more! Rarer in the post SOX world.

4) Traditional soft compensation: vacationing in the Far East... Would you mind visiting the Singapore office next month? The list is endless.

The "great" thing about this is that, if you increase individual income tax rates, equality seems to increase (because a lot of comp just vanishes.) Lower the top rate, and inequality suddenly increases as a lot of deferred money is realized as after-tax income.

In the high-comp world, you want low tax rates, but you don't need them all the time: 1 year in 10 is fine... just defer for the other 9. Throw in a few 'minor' things like the 2010 IRA->Roth conversion option, and like is good for the top 1%.

[don majors]

It's preposterous to suggest that gathering wealth at gross unequal rates is not caused by government policies, financial ignorance of the working masses, and published or misdirected or distorted wage information by employer groups. Management collusion, unlawful entitlement actions, taxfree perquisites and loopholes.

I'd guess that the magnitude of inequalities in wealth formation does not exist in the various governmental Civil Services, Uniformed Services, NEA, Universities, and other organized employee groups compared to executive managements.

I recall the "income gap" for engineering graduates during the Cold War. Engineer salaries for inexperienced graduate engineers were comparable to seasoned practitioners. Except that some employees were "vested" by virtue of seniority. Undisclosed were the unvested benefits including: insurances, pensions, layoff totems, and upward mobility paths. All was well until the layoffs hit the Aerospace Indusries. Unemployment is the average income leveller. And grievances? Fogetaboudit! Inequalities abound.

There is still a lack of uniform benefits throughout the National production system. Especially with small firms which typically need the added capital derived by having labor provide the capital to offset the requirements of management/entreprenuer pay and perquisites. This is the incentive to hire illegal immigrants, to outsource production and procurements to smaller firms or offshore. Likewise the divesture of production to new entities formed by former managers is enhanced by favorable lending practices.

Governmants have the primary roll in maintaining a "level playing field" for all players in the national economic system ... just as they formulate their own personnel policies.

[Matt Lantz]

I think it has more to do with leadership, not tax policy.

[joan]

The graph at this link is the time history of the percentage of income going to the top 5% split between the top 1% and the next 4%

http://www.visualizingeconomics.com/
2006/04/03/breakdown-of-income-share-top-5-1917-2002/

The top 1% curve mostly explained by the stock market booms and busts and tax policy. The sharp rise in their income share around 1987 the time of the major tax code revision strongly suggest that this represents previously sheltered or hidden income being reported. The steady rise after is probably due to the dot com bubble and a response to the much lower top tax rate making extremely large sarlies worth seeking in occupation where competitive markets don't determine salary. (CEO, movie stars, etc.).
The slow steady rise of the of the next 4% is probably due to the reasons already mentioned, pro small business policy, immigration, trade, deunionization, etc that has already been discussed. It is worth noting that the upward slope started in the late 60’s, when the baby boomers entered the job market, but accelerated during the Reagan years. It should also be pointed out that the trend continued unabated in the 1990's.

[Dirty Davey]

Something else is going on with the shift from manufacturing to less capital-intensive and/or less labor-intensive forms of production.

An obvious example... 50 years ago, for Ford to double its sales of cars would have involved vast investment of capital and use of labor to build new plants, followed by continued use of approximately twice as much assembly labor as before.

Today, were Microsoft to double its sales of Office, there would be an increase in the fairly small number of workers involved in packaging and shipping... but the need for significant capital investment would be low, and the programming team might not need to grow at all.

To the extent that we've seen a growth in economic sectors where the marginal cost of production is negligible (software, movies and music) and shrinkage or shift abroad of those sectors where the marginal cost is significant (manufacturing), it seems that this shift could be making a significant contribution to inequality.

Now there may be political decisions driving some of this shift--for example, making foreign manufacture and importing easier--but the changing nature of industry does play a role.

[marc sobel]

polarized armerica is all about this issue.
http://voteview.com/Polarized_America.htm
Brad, you certainly could understand the mathematics and it is a short book.

[digamma]

Whenever I see a Democrat claiming a negative trend began in 1980 I'm very interested to know what they think Jimmy Carter did wrong, since he was President every single day of that year. Now, if you found a trend beginning in 1981, that might be Reagan's doing.

[theCoach]

This seems quite nearly insane to me.

Let me propose some (perhaps inadvisable)government policies.

Eliminate legal protections for corporations.
Eliminate Intellectual Property protections and trademark protections.
Impose a 100% tax on incomes above $200K (including any form of income).

Is it really probably with government policies listed above that income inequality at the levels Brad is talking about would persist? The last one alone would virtually assure that people not be paid outrageous incomes, no? Therefore, government policy controls the whole thing.

The idea of some perfect free market floating in space is an especially pernicious one in today's culture.
What I think Brad is actually driving at is that he thinks that inequality would have increased if the government had limited itself to policies with a growth target of (some acceptable level X).
I think he is likely wrong, and that there are pro-growth policies, especially with regard to empowering mid and lower level employees to bargain for wages indexed to inflation in such a way to control inflation without the heavy hand of the Fed, but these are questions for future economists.

But as the question is stated it is clearly wrong, as indicated by the examples above, and as it is framed it has a pernicious effect on cultural attitudes, which, as has been pointed out ably above, also has an effect on this phenomenon.

[Randolph Fritz]

It's hard to judge the overall situation, but my impression is that the only industrial production the USA is now doing well only in subsidized sectors, and that means not a lot of work for not a lot of people. While no single policy has contributed to this, it is a failure of governance.

Contributing government policies:
1. Huge military expenditures, drawing capit and labor away from actual productive work.
2. The legalization of large-scale fraud and usury.
3. The on-going collapse of the health care systems.
4. The collapse of agreements which stabilized international currency and trade.
5. Policies unfavorable to labor, both domestically and internationally.

[James Galbraith]

A few data-based comments on Krugman's chronology:

The Great Compression, 1929-1947: The birth of middle-class America....

Comment: Balls. Ferguson and I measured the movement of wage inequality comprehensively and on an annual basis from 1920 to 1947, in an article published in Research in Economic History and referred to in my earlier comment. There was a huge *increase* in pay inequality and a collapse of the then-existing middle class in 1929-33. The birth of the modern American middle class occurred from 1941-1945, strictly as a result of the war-time mobilization, which transformed the wage structure and vested American households with large holdings of series E bonds -- financial wealth they had never before possessed.

The Postwar Boom, 1947-1973: An era of widely shared growth....

Comment: The fifties were, on the contrary, a period of multiple recessions, with sharply rising pay inequality in the early years. The real boom years were 1962 to 1969. They ended with the recession of 1970. 1971-72 was a very unstable period, marked by price controls and a strong but unsustainable Keynesianism in Nixon's reelection campaign.

Stagflation, 1973-1980: Everyone lost ground....

Comment: Stagflation started in 1970, and was the provocation for Nixon's bout of price-wage control. Inequality rose during this period. But not everyone lost ground. With the oil boom, the oil producers and the places they come from gained ground, both in the U.S. and abroad. The late 1970s were a boom period for Texas, Oklahoma, Louisiana..

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.

Comment: This too is very misleading. There was a huge recession in 1981-2, with vast increases in pay inequality. The late 1980s saw a reasonable recovery; further increases in income inequality occurred but they were largely due to changes in household composition rather than in pay structure.
But remembering the huge stock market crash of October 1987, it's hardly reasonable to call this period a "gilded age." There followed yet another recession in 1990-92.

If by a "new gilded age" one means a stock-market-driven bubble as in the 1920s, with gigantic increases in *income* inequality driven by financial valuations, then the gilded age really got going in the late Clinton years. Like the 1920s, this was a period of broad prosperity and falling *wage* inequality, driven by the expenditures of tech firms riding the bubble up. It wasn't a bad period for most people: just unsustainable, as we learned.

Final comment: Comparing real incomes with average real manufacturing wages is statistically not kosher, since the latter are strongly affected by changes in the composition of what is described as a manufacturing job.

Final, final comment: there is no substitute, in this business, for careful work with actual data.

[anne]

http://www.calvorn.com/gallery/photo.php?photo=6535&u=297%7C16%7C...

Yellow Warbler Perched on a Rock
New York City--Central Park, The Pool.

Thank you so much, and look for Texas birds, James :)