I’m working on a paper based on a model of an economy with high and growing levels of income and wealth inequality. I’ll say more about it later, but in coming days, time permitting, I’ll post snippets that might be of interest. For example, one prediction generated by this model is that policymakers advocate on behalf of the beneficiaries of inequality for regressive changes in taxes and transfers. They inveigh against both progressive taxation and social insurance.
Any of that ring a bell??
So here’s a figure, using very comprehensive CBO income data to show that, in fact, taxes and transfers have become less of a bulwark against rising inequality. Each bar in the figure shows the percent increase in the Gini Index (a measure of income concentration) under three different definitions of income. Using just market income, the Gini rose 23%, 1979-2007. Adding government transfers, the Gini actually rose more—by 26%. This may seem a bit confusing to those who recognize that transfers are equalizing, but the source of such confusion is the conflation of levels versus changes. Of course, the Gini index is lower at any point in time after transfers (and taxes), but less so over time. Thus, both transfers and taxes have become less effective in reducing market based inequality, a trend the model would predict.
Here is a list of other policy developments predicted by the model:
- Regressive tax changes
- Shift from labor to capital incomes
- Deregulate financial markets
- Privatize social insurance
- Eroding labor standards (min wage, labor protections)
- Diminished unionization; opposition to collective bargaining
- Pro outsourcing
- Monetary policy favoring low inflation over full employment
- Diminished gov’t commitment to education
- Eroding safety net
- Anti-Keynesianism; pro austerity
- Let-it-rip campaign finance
- Smaller gov’t outlays as share of GDP
Jeez…that kinda reads like I’ve got my thumb on the scale…but you’ll see—these pop right out of a model where inequality diverts not just growth, but opportunity, mobility, and political clout from middle and low-income households.