Yet again and again [economists and other researchers not named Hacker or Pierson] have found themselves at dead ends or have missed crucial evidence. After countless arrests and interrogations, the demise of broad-based prosperity remains a frustratingly open case, unresolved even as the list of victims grows longer.
All this, we are convinced, is because a crucial suspect has largely escaped careful scrutiny: American politics. – Jacob Hacker and Paul Pierson, Winner Take All Politics
Here's a chart showing trends in the share of income received by the top one percent for all the modern industrialized nations for which data is available going back to the early twentieth century:
The data is from a new website created by several of the leading scholars studying inequality with tax data. The American trend, the thick black line, is from the much cited work of Thomas Piketty and Emmanuel Saez, which is part of this new database.
From 1910 to 1970, American inequality trends follow the broad international pattern, and inequality levels are in the middle of the pack. That's basically still true from 1970 to 1986:
It's rising a bit over the period, but only by a percentage point. Note I'm keeping the scale of the charts the same for each one. Here's the chart for 1988 to 2006:
Uh-oh. Now we look like our inequality levels are higher than everywhere else. What happened? 1986 to 1988 happened, as is evident from the 1970-2006 trend:
Wow, that's a four percentage point increase in two years—three times the increase over the 16 years from 1970 to 1986, and bigger than the 12-year increase from 1988 to 2000. Huh. There are two possibilities here. One is that the data is right. You can see where I'm going here.
It helps to know that the 1986 tax reform created big incentives for people who had previously reported income on corporate returns (where it is invisible to the datasets above) to report on individual income tax returns (where it appears as an out-of-the-blue increase). And if this may be considered a permanent change in the tax regime, then the effect is for more income to show up on individual returns after 1986 than before, artificially lifting the top income share in every subsequent year.
Hmmm...which possibility is more likely? Let's look at another chart showing the trends just for the northern hemisphere Anglophone countries, to which I'll add a new line:
OK, from about 1940 to 1986, these trends line up strikingly, then the U.S. trend goes AWOL. However, let's instead assume the post-1986 U.S. trend is an artifact of the 1986 tax reform. First, let's increase the top one percent share from 1986 to 1988 by the same rate that it increased in the U.K. Then let's let the top share in the U.S. increase by the same rate that it actually did from 1988 to 2006, but from the new, lower 1988 level. The result is the revised line above. This makes the U.S. trend and level consistent with not just the U.K., but Canada.
Of course, if the 1988 to 2006 top share levels are more accurate in the U.S. after 1988 than before 1986, then rather than lowering the post-1986 trend, we should raise the pre-1988 trend. That would make U.S. levels uniformly higher than in the U.K. and Canada. But of course, the measured U.K. and Canadian top share levels may also be artificially low due to tax avoidance. And of course, the common trend over the three countries would remain.
So, to review, when the post-1986 U.S. trend is corrected, the U.S. experience with inequality over the past 100 years is broadly consistent with the rest of the modern world. Here's the summary chart for 1910-2006, with the revised U.S. trend.
Comparing levels is more difficult, but many recent cross-national comparisons related to inequality are about why trends differ. What these five charts clarify is that explanations for the recent rise in American inequality that focus on uniquely American causes—such as greater political muscle-flexing among corporations and the mega-rich—are insufficient (and unnecessary).
Update: I've received several responses offline that it's going to far to say the experience of the U.S. is like that "everywhere else" and that it is really only like the other Anglophone countries. To some extent, that's a fair criticism. But of 15 countries shown here, only Germany, the Netherlands, and Switzerland haven't experienced an increase in inequality since 1980. And the increases in Norway and Finland are as big or bigger than in the U.S., U.K., and Canada. Sweden's increase is also nearly as great in relative terms (starting from a much lower level of course). But even if this is a story about the U.S., U.K., and Canada or the Anglophone countries versus the rest of the world, that's still a problem for Hacker's and Pierson's U.S.-centric theory.
I thought the chart below that Tyler Cowen highlighted yesterday was fascinating, precisely because it begs Tyler's question, "What happened in 1980?" Unfortunately, the discussion got immediately sidetracked. The Incidental Economist guys argued that the chart was somehow wrong and there was no big jump in health care inflation in 1980. But as Kevin Drum points out in a comment to the post, their trend basically looks just like in the chart they are criticizing. Then Tyler posted an email excerpt from Austin Frakt of Incidental Economist that focused on why things flattened out in the late 1980s.
Let's dial this conversation back. The fascinating thing about the original chart is how the U.S. pulls away from all the other countries starting in 1980. So, fine, maybe there's not a dramatic change in trajectory in the U.S. beginning in 1980, but American health care inflation departs from the relatively tight pack of countries that it was part of prior to 1980 in a dramatic way. I'd love to hear the IE guys and other health care experts hypothesize why that is.
My main interest in the chart is related to my (on-going, but much delayed) research into inequality trends. Richard Burkhauser and Kosali Simon have shown that the rising cost of health insurance basically explains the (small) increase in income inequality that occurred in the late 1990s and 2000s.* The exceptionalism of the American health care inflation trend in the 1980s mirrors the sharp increase in measured income inequality in that decade. Might the two be related somehow? Perhaps accounting for health insurance would reduce the apparent rise in inequality. Alternatively, perhaps the rise in income inequality might explain the American exceptionalism. Inquiring minds want to know! (mine anyway...)
Sorry for the light posting, by the way--there is a very cute 7-month-old to blame.
*Disclosure: my employer funded the research they conducted, and I played a primary role in the decision, but rest assured that my employer wants a big distance between this blog and its own work!
Happy Fourth of July everyone! The first time we celebrate the birth of the nation with an African-American president.
I'm excited to report that my new Kindle DX arrived yesterday (early verdict: very cool).I toyed with the idea of buying, as my first book, Infinite Jest, but I couldn't bring myself to take the plunge and begin my first novel since the mid-1990s.Instead I bought Grand Expectations, James T. Patterson's history of the U.S. from 1945 to 1974.Chapter Two is about the state of the labor movement at the beginning of the period.Lots of interesting stuff, as this was really the peak of the labor movement in the U.S., with a high of 35% of non-agricultural workers in unions in 1945, and one in fourteen workers participating in work stoppages in 1946.
What's interesting to me is that even then, you can see signs that labor's power was tenuous. Massive strikes had thin support among Americans.There is a remarkable recounting of Truman's response to a potentially crippling railworker strike in which he marches to Capitol Hill to give an address. Truman planned to propose legislation that would allow him to draft striking workers into the Armed Forces in the event that a strike would create "emergency" conditions.With his intentions widely known, Congress gave him a standing ovation upon entering the House.Before the speech ended, Truman had been handed a note relaying the news that the railworkers' union had backed down.(Even more remarkably, a draft of a proposed radio address the night before that his aides squashed ended, "Let's put transportation and production back to work, hang a few traitors, and make our country safe for democracy.")
Remember, this was a pro-New Deal president--the populist "Give 'em Hell Harry"--with a Democratic Congress.
Labor basically got nowhere with its legislative agenda during this period--conservative Democrats from the South and West and pro-business Republicans held the balance of power. Republicans won control of both houses in 1946, and Congress overrode Truman's veto the next year to pass the anti-union Taft-Hartley Act.
Meanwhile, by 1950, labor leaders had basically reached a truce with capital: union members would get cost-of-living adjustments to their pay and increasingly generous benefits, paid for via price increases levied on consumers.Non-union members were basically S.O.L.
Many progressives seem to believe that the weakness of labor today is mainly a consequence of the Reagan Revolution and soft-spined Clintonites.But the following chart, based on OECD data, should disabuse them of this fantasy:
Note first that in 1960, the U.S. and Canada had less unionization than even the other Anglophonic countries (also true of other western European countries except Italy and France).Second, note that by the time Reagan took office, unionization in the U.S. had already dropped from 31 percent to 22 percent.Finally, note that unionization began declining in the other countries between the mid-1970s and the early-1980s.Unionization has also fallen in most of western Europe, where it peaked in the Netherlands and Norway by the early 1960s, in France and Austria by the late 1960s, in Switzerland by 1976, in Italy in 1976, Portugal in 1977, Germany in 1978, Denmark in 1983, etc. Finally, note how much the cross-national differences narrowed over time vs. 1975 or 1980. How did Reagan defeat the unions in those other countries?
So why the decline if not politics? I'm no expert on this question, but I'll try and speculate a bit in my next post. Meantime, leave a comment if you want to weigh in (eventually I'll have a comments section publicly displayed, but that's in progress).