Developed Country Political Economy Rolling Links Edition 5 September 2011

NB: This is a progressively updated post. I've added the date to the post title to dentify the current version.

Recently, I've been reading a lot of versions of a similar general narrative which ties together changes in the political economy of the developed countries (especially the English-speaking ones) over the past 30 years. This time period has seen the wealthiest few percent of society recieve the great majority of gains from increased productivity and economic growth; middle class incomes stagnate; inequality consequently increase; and historical social compacts fray and start to fall apart. The share of GDP going to wages and salaries has fallen, and the the finance sector has become more important and powerful.

A lot of the story is summed up, for the United States at least, by this graphic in the New York Times showing the relationship between productivity and wage increases, income gains for the different groups in society, share of income held by the top 1%, and household debt. These trends are divided up into two periods: the"Great Prosperity" from 1947-79, and the neoliberal era from 1980-2009.

There's a lot of debate about the causes of these changes, their significance, and what to do about them. Paul Krugman in particular has written a lot about the relationship between deregulated finance, economic instability and inequality, as well as the strange and changing social attitudes that accompany the reappearance of plutocracy. But there are lots of other angles too, including thoughts about the consequences this maldistribution will have as resource shortages start to bite. A personal interest is in how the rich countries are increasingly starting to suffer from afflictions historically associated with the Third World. In a way, we're all becoming banana republics. I've made this into a rolling update post, so I can gradually incorporate the best discussions.


At Crooked Timber, John Quiggin draws a link between the massively disproportionate share of wealth now held by the top 1 percent in the United States and the breakdown of social compacts about tax and public services. As usual on CT, here's a long and interesting discussion in the comments section.

There's a follow-up from Quiggin in which he addresses responses to his first post suggesting a) that lower taxes on the wealthy don't affect total government revenue; b) that consumption inequality is lower than income inequality (maybe, but the difference is made up by increased debt); and c) [from Matthew Yglesias] that progressive action is still possible with current income distributions (perhaps at the margins, but many of the things Yglesias mentions relate ultimately to inequality).

In a third post, Quiggin reiterates the points that "when the top 1 per cent have 25 per cent of all income and this share is steadily growing, a government that doesn’t soak the rich can’t do much more than spread the pain a bit more evenly".

Anthony Robins at The Standard has a summary of "supply-side" arguments which suggest that tax cuts actually result in a higher tax take or at very least produce greater economic growth.

Also at The Standard, Rajan notes how some very wealthy people in the US and Europe have become so concerned about disproportionate wealth imbalances they are demanding to pay more tax.

But is there too much attention to tax? Dean Baker suggests so in a summary of the premise of his book, The End of Loser Liberalism: Making Markets Progressive. Baker argues that tax issues are peripheral compared to the policies that redistribute before-tax income upwards, including anti-union labor laws, "too big to fail" policies for large banks, and strengthened protections for patent and copyright holders. He stresses that:

This is important for both policy and politics. If we have a hugely unequal distribution of before-tax income, even strongly progressive tax and transfer policy is likely to have a limited effect in ensuring that the bulk of the population benefits from economic growth. Furthermore, the politics of relying on tax and transfer policy to reverse the inequities built into the design of the market are horrible. It plays into the conservative story that progressives want to tax those who are innovative and hardworking to provide handouts to those who are not.

John Schmitt summarises what he calls a "surprisingly hard-hitting paper" from mainstream economist Robert Gordon. Gordon concludes that the current shortfall of 10-14 million jobs is due to excessive "managerial power". Schmitt quotes Gordon as arguing that:

The weakened bargaining position of workers is explained by the same set of four factors that underlie higher inequality among the bottom 90% of the American income distribution since the 1970s – weaker unions, a lower real minimum wage, competition from imports, and competition from low-skilled immigrants.

In addition, the increase in stock options as a part of executive pay packets has ecnouraged a slash and burn approach to cost cutting, including employee layoffs. Thus, according to his econometric analysis, "for every worker tossed overboard in a sinking economy prior to 1986, about 1.5 are now tossed overboard".

Increasingly, the most insightful way to view all this through is  comedy. Here's Jon Stewart in top form, taking on the reaction to Warren Buffet's op-ed while lampooning the "class warfare" and "free ride for the poor" meme pushed by Fox News and other conservative vox pops:

So raising the income tax rate on the top 2 percent of earners would raise $700 billion dollars, but taking half of everything the bottom 50 percent have in this country would do the same. I see the problem here: we need to take all of what the bottom 50 percent have.

Stewart might be amusing, but some of the comments towards the end of the second video clip suggest that his satire is Swiftian in its dscomforting closeness to reality.