The Effect of Politics on Income Inequality

| Wed Mar. 16, 2011 9:13 PM EDT

Ezra Klein reviews Winner-Take-All Politics in Democracy this month and provides an excellent summary of its core thesis, namely that income inequality isn't a result only of economic trends, it's also a result of deliberate political decisions. But I thought this criticism was odd:

The problem for Hacker and Pierson, in other words, is that just as the economists aren’t very convincing on the politics, they’re not sufficiently convincing on the economics. It’s true that the political system has shifted toward emphasizing the interests of the rich, and it’s true that that’s probably had a significant impact on both the rich and everyone else. But how much of an impact? And what would have happened if the distribution of political power had remained frozen at 1973 levels? That’s harder to say.

What their theory explains, in the end, is not so much why median wages stagnated and income inequality skyrocketed, but why the political system has been so feckless and haphazard about responding. A political system where unions held more clout and politicians weren’t so addicted to the money provided by rich donors would be a political system that would likely have taken some of these problems much more seriously.

Italics mine. Unless I'm reading something wrong, this isn't a criticism of Hacker and Pierson at all. Rather, it's exactly what they themselves say in the book. I don't think they claim that economic fundamentals have nothing at all to do with rising income inequality and wage stagnation, merely that politics is also involved and its influence is routinely underestimated. What's more, their "drift" theory, which Ezra describes earlier in the review, argues that a lot of this political impact on wage stagnation comes precisely from doing nothing in the face of changing economic norms. So everyone is on pretty much the same page here.

In any case, this reminds of another small point about this stuff that I've never made before. So I'll do it here. My piece about the decline of union power in the current issue of MoJo probably left the impression that I think union decline is responsible for most of the recent stagnation of middle-class wages. But that's not really the case. It just happened to be the piece of the puzzle I wanted to highlight.

Here's how I think about this. Income inequality and wage stagnation have roots in both economics and politics. For the sake of discussion, let's say that it's caused half by economic factors and half by political factors. So how big is the influence of unions here? On the economic side, a decent guess is that unions are responsible for perhaps 15-20% of rising income inequality, and since economic factors are half of the total, that comes to about 7-10% or so. But they also have an impact on the political side of things, and here I'd put their influence at more like 40-50% or so. In other words, 20-25% of the total.

Add up both their economic and political effects and union decline might be responsible for around 30% of rising income inequality.1 And the bulk of that — though not all of it — is because of their indirect effect on the political process. That's a fair amount, and well worth talking about, but it's still much less than half and it leaves lots of room for other factors. This is simply not an issue with a single simple answer.

1Obviously you can noodle around with these numbers and come up with a different total. Maybe it's really more like 20%. Or maybe 40%. I don't know. But I think this is a useful framework for thinking about this stuff.