Income inequality

There's a debate going on in the blogosphere among blogger economists that was spawned by Paul Krugman's column in the NY Times the other day arguing that the increase in income inequality in the US is not due simply to increasing returns to education, as Treasury Secretary Henry Paulson claimed recently, but due to government policy. Republican policies have led to increasing inequality while Democratic policies have pushed for greater equality according to Krugman. See here and here and here, for example.

Many economists, even liberal economists, took issue with Krugman's allegation, particularly as it relates to pre-tax income, arguing that there are no real ways that goverenment policy could have had that much effect on pre-tax income. Hence, they argue, the rise in income inequality must be due to other, more natural economic factors, such as changing technology. Others have argued that there are several plausible policy mechanisms, including minimum wage laws, enforcement of labor relations laws, welfare policies, and the fact that higher after-tax income in one year leads to higher pre-tax income in the subsequent year due to earnings on the reinvested after-tax income from the prior year.

To some degree, the arguments raised by those on the Krugman side of this argument, while true, don't seem to have enough behind them to convincingly explain the magnitude of the effect.

I'm going to step in here with one additional observation on the “liberal” side of the argument. It seems to me that much of the growth in income inequality may be explained by differences in the accepted norms of social behavior associated with the conservative v. liberal divide. During recent periods when Republicans have been presidents, the view that chief executives and other high level managers have reached those high positions because they were far more productive than those in lesser positions has tended to prevail. The more people believe that myth, the more justified are the CEOs when they (or their buddies on the Board) vote themselves huge pay raises and bonuses and the easier it is for them to do so.

This trend is augmented by the social Darwinism of the conservatives when they are in power. The poor are poor because they are either stupid or unwilling to work. In either case, they don't deserve to make much money. The rich are rich because they are the productive people in our society. They deserve an ever increasing share of the income and wealth. I suspect that the widespread acceptance of these views tends to result in decisions at all levels of the economy that tend to promote income inequality. As a businessman, you treat the workers like dirt because they are dirt. You give yourself and your buddies in management a big pay increase because you think you are the elite.

This may not really be an effect of “economic policy” per se, but it seems to me it probably does play a role in the outcome for income distribution.