Politics and Inequality

Ryan Avent is surprised that I think politics has a great deal to do with the level of inequality. He writes:

Even the liberal Ryan Avent believes that only some, and substantially less than a “great deal,” of the increase in inequality is due to the direct effects of taxation and redistribution. Will’s fellow libertarians Brink Lindsey and Tyler Cowen join me in believing that research by Claudia Goldin and Lawrence Katz offers the more promising explanation for much of the widening in the income spectrum. They argue that the big jumps in inequality are due to a slowdown in the growth of skilled worker supply. This supply constraint boosts the premium earned by the most educated workers and holds down wages for the unskilled.

I guess it depends on what we mean by “a great deal”. What I mean is that I agree with Krugman and Bartels that had tax and transfer policy been different, income inequality would be lower. I think this is hard to deny. Almost all the developed European economies have seen increases in inequality caused by the supply and demand for skill, same as us. But I’m pretty sure we’ve seen a larger increase in income inequality, and this has to do with policy differences we have with most European countries, which are driven by both cultural differences and unique structural features of America’s 18th century constitution.

Krugman and Bartels think the problem is the influence rich people have on public opinion and the policy process. I think they end up really lamenting the fact that many Americans have very strong substantive moral views about inequality, mobility and the morality of redistribution that make European levels of taxation and redistribution politically infeasible. They also keep banging straight into the problem that if government is empowered to heavily affect people’s fortunes, then people with the biggest fortunes will have the most at stake when it comes to influencing government. The idea that the government should do much much less is completely unacceptable, so they are left chasing their tail — trying to get money out of politics without simply increasing the incentive for money to get into politics — with mounting indignation.