Monday, January 31, 2011

Simple Answers to Complicated Questions

Ezra Klein:
... [I]f you believe that Reagan substantially transformed American politics, what features of the state or trends in the economy do you consider the strongest evidence for your thesis?
From Keith Poole's talk "The Polarization of American Politics"

Income inequality (the red line) was close to its all-time measured low at the time of Jimmy Carter's inauguration. It rose slightly during his presidency, but really took off during the Reagan years, and has shown no signs of turning back, other than a brief respite in 2008 when the financial meltdown sapped income of the financial class. (Update: here are some more charts on income inequality, most of which show things starting to spin out of control in the Reagan years).

Some of this can be attributed to a new mindset at the Fed, which prioritized keeping a lid on inflation over maximizing employment. But changes in tax and regulatory policy, particularly in finance, have also played a role in widening inequality, and for those I think we have The Great Communicator to thank. In retrospect, eliminating the top tax bracket has been a godsend for the ultra-rich, who now can have solidarity with upper-upper middle class when it comes to raising the top marginal rate.

Update II: just a note on the correlation here. This shows that political polarization is highly correlated with measures of income inequality. For metrics where we have data going back to the early 20th century, the correlation is weaker but still easily visible, mostly because the inequality measurements we have aren't as good. This part of the chart has nothing to do with Reagan ushering in a new conservative era. It's just a convenient side effect. Reagan seems to have presided over an initial rise in inequality, which help drive political polarization.

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