Friday, October 02, 2015

much inequality has been caused by politically-induced decisions


paecon |  This article analyses causes of high and persistent income inequality in the U.S.2 The analysis provides an explanation of the interconnected factors behind rising income inequality and the upward redistribution of national income from labour to capital. Followed by a series of reports about rising inequalities from various International Organisations (IO) (ILO 2011; UNCTAD 2012; OECD 2011b), the interest peaked after the publication of the English translation of Piketty’s (2014) Capital in the Twenty-First Century. The publication triggered a heated debate and brought widespread attention to the issue also from non-academic circles ever since. Not surprisingly, there is as much empirical evidence supporting as broad a variety of arguments as scholars working on the subject.

The interaction between exogenous and endogenous drivers of inequality is of particular interest. At first sight the global trend towards increasing inequality across developed and developing economies suggests that exogenous forces are the main driver of inequality. However, the impact of exogenous drivers can be counteracted or reinforced by national policies and are thus highly country-specific. For example the experience of most countries in Latin America which successfully reduced inequality while being subject to the same exogenous drivers as other countries, suggests that countries do have the means to reduce inequality. One major influence on inequality are the policies adopted (or not adopted) by the respective governments. Those vary considerably across regions and countries and alter the distribution of income significantly. It is argued that the political dimension as an endogenous driver of inequality has been neglected to the benefit of economic-based explanations. Some political scientists and sociologists have explored possible political explanations of increasing inequality (DiNardo, Fortin, and Lemieux 1995; Bartels 2010; DiPrete 2007; Rosenthal 2004), while economists have mostly neglected the role of the political.

How and to what extent the political dimension has contributed to increasing inequality has been under-researched. In order to analyse the political causes of increasing inequality the U.S. has been chosen as a case study. The research question reads as follows: Which factors are the main drivers of income inequality in the U.S.? The U.S. is of particular interest because the country has experienced a sharp increase of inequality relative to other countries. In addition to that the U.S. is one of the few countries where continuous and reliable data is available. This enables the analysis and comparison of the changing patterns of income inequality from the early 1950s onwards.

Partly, as it is argued, inequality has been caused by politically induced decisions. Certain policies, such as the decreased support for unions and tax cuts favouring the relatively well-off and corporations, have benefitted a small minority of the population at the expense of the majority and have thus contributed to widening income inequality. It is argued that this particular type of income inequality leads to representational inequality. High and persisting inequality in the U.S. has contributed to the strengthening of an economic elite who have a vested interest and the means to influence policies accordingly which increases and perpetuates inequality. This in turn reduces the purchasing power of the majority of the U.S. population (and hence aggregate demand). Thus, growth stalls also due to decreasing means of purchasing goods and services for the majority, or, contributes to economic and financial instability because the stagnating real wages are compensated by increasing accumulation of debts (Onaran and Galanis 2013, 88).