Income Inequality

Is Income Redistribution the Key to Economic Growth? | Contrarian Musings

This is an interesting article on the causes of income inequality in the US. The argument is that the ending of the Bretton Woods era, when the US came off the gold standard and allowed the Fed to manage the money supply, is the primary cause of the increased wealth and income inequality over the last thirty years. The view is interesting and may very well be true or at least partially true though I'll leave that argument to those better qualified.

However, this leaves me suspicious of the argument, or at least the motives behind the argument.

(Quoting from a Mark Thoma article)

From the end of World War II until the 1970s, the growing prosperity in the US was widely shared across income groups. However since the 1970s, households at the lower end of the income distribution have experienced income stagnation – “real average hourly earnings (excluding fringe benefits) now stand roughly at 1974 levels” – while those at the top of the distribution have continued to do quite well. (emphasis added)

How can so many smart economists, from Paul Krugman to Mark Thoma, write that sentence or one very similar and not ask the obvious question? What changed? Was there a change in some major macro economic policy in the 1970s that could have affected equality of income and wealth in such a dramatic fashion? Why did inequality start rising so rapidly even before the election of Ronald Reagan? Why did it start rising before the top tax rates were reduced and before the adoption of freer trade (globalization)?

Average hourly earnings may have been stagnant since 1974 and the ending of Bretton Woods system may be responsible for that, but this chart of the US (and other) Gini coefficients makes it pretty clear that the rise in income inequality did not start in 1974 but in 1982-83. Look at the chart, the Gini coeffecient was pretty flat or slightly decreasing from the 1950's to 1982 then it jumps in 1982-83 and has increased steadily ever since. The inequality started changing 10-11 years later, it seems a stretch to assign Bretton Woods the responsibilty for this.

I think the question "What changed?" is a valid question, it's just that the time period is wrong. They should be looking at the 1982-83 period. What happend at that time that could be responsible? Well, how about the Reagan Tax cuts for the wealthy, reduced Government regulation? Maybe?



  1. Yes the Reagan tax overhaul, which included the huge hike in the FICA payroll deductions("to save social security"), was a big part of the shift but more of an impact is related to the abandonment of workplace immigration law enforcement.

  2. i suppose there are many contributing factors, tax cuts and changes, deregulation, globalization, the end of Bretton woods maybe, immigration maybe, the decline of unions, the growth of the finacial industry and decline of manufacturing. All these seem to be working against a more equal income distribution.

  3. union members as a % of workers has been falling since roughly 1953, but the gini coefficient did not rise with that alone. At a certain point though one can certainly surmise that a critical decrease in mass had occurred where unionization no longer had the cumulative effect in the marketplace that it once had, so it no longer acted as a brake against stagnant wages. Thus it allowed the 82-83 tax cuts a much more devastating effect of inequality than they would have had 20-30 years earlier. Other factors like deregulation, esp. of the financial industry, also I think are similar in that the lack of unionization acts as an accelerator of their effects on multiple levels. Not just in terms of worker resistance, but political resistance in terms of voting and lack of Congressional desire to support a union constituency because it no longer exists, and culturally as hatred for unions is explicit and vocal even in the northern/mid-western states that are the most heavily unionized now.