Sunday, May 3, 2009

Politics matters: Evidence of rising inequality in the US

I have stumbled upon a very interesting article by Emmanual Saez, this year's recipient of the Clark Bates medal, the so-called Nobel prize for economists below 40.

Saez et al show that " 1 percent incomes captured abouthalf of the overall economic growth over the period 1993-2006."

They also show that politics matters: during Clinton growth has lifted all boats (although inequality still increased), while during Bush II practically only the richest benefitted:

"The 1993–2006 period encompasses, however, a dramatic shift in how the bottom 99 percent of the income distribution fared. Table 1 next distinguishes between the 1993–2000 expansion of the Clinton administrations and the 2002-2006 expansion of the Bush administrations.
During both expansions, the incomes of the top 1 percent grew extremely quickly at an annual rate over 10.1 and 11.0 percent respectively. However, while the bottom 99 percent of incomes grew at a solid pace of 2.4 percent per year from 1993–2000, these incomes grew less than 1 percent per year from 2002–2006. Therefore, in the economic expansion of 2002-2006, the top 1 percent captured almost three- quarters of income growth. "

What explains rising inequality over the last thirty years? The change of intellectual trends driven by Reaganomics and Thatcherism seems to have mattered.

"The labor market has been creating much more inequality over the last thirty years, with the very top earners capturing a large fraction of macroeconomic productivity gains. A number of factors may help explain this increase in inequality, not only underlying technological changes but also the retreat of institutions developed during the New Deal and World War II - such
as progressive tax policies, powerful unions, corporate provision of health and retirement benefits, and changing social norms regarding pay inequality"

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