Why Hasn't Democracy Slowed Rising Inequality?

Abstract

D During the past two generations, democratic forms have coexisted with uring the past two generations, democratic forms have coexisted with massive increases in economic inequality in the United States and many massive increases in economic inequality in the United States and many other advanced democracies. Moreover, these new inequalities have other advanced democracies. Moreover, these new inequalities have primarily benefi ted the top 1 percent and even the top .01 percent. These groups primarily benefi ted the top 1 percent and even the top .01 percent. These groups seem suffi ciently small that economic inequality could be held in check by political seem suffi ciently small that economic inequality could be held in check by political equality in the form of "one person, one vote." equality in the form of "one person, one vote." Indeed, the notion that inequality should be at least partially self-correcting Indeed, the notion that inequality should be at least partially self-correcting in a democracy has a long pedigree in economic theory. In the canonical model of in a democracy has a long pedigree in economic theory. In the canonical model of Meltzer and Richard (1981), increased inequality (in the form of median incomes Meltzer and Richard (1981), increased inequality (in the form of median incomes falling relative to average incomes) leads the median voter to demand more redistrifalling relative to average incomes) leads the median voter to demand more redistribution, so that politics should limit after-tax and -transfer inequality. Redistribution bution, so that politics should limit after-tax and -transfer inequality. Redistribution is limited, however, by the consequences of how the higher rates of taxation reduce is limited, however, by the consequences of how the higher rates of taxation reduce labor supply. A stripped-down version of this model, with similar implications, is labor supply. A stripped-down version of this model, with similar implications, is the model developed by Bolton and Roland (1999), where redistribution is limited the model developed by Bolton and Roland (1999), where redistribution is limited through deadweight loss in taxation. These early approaches (see also Romer 1975) through deadweight loss in taxation. These early approaches (see also Romer 1975) assume that politics is majoritarian, equal (one person, one vote) and with full assume that politics is majoritarian, equal (one person, one vote) and with full participation (all economic agents vote). participation (all economic agents vote).

Looking at Stratification in Education Through a Modern Day Prism

“…These findings are aligned with those of George (2006), Belkhir, et al (1994), Bonica, McCarty, Poole and Rosenthal (2013) and Nagrad and Nagrad (2014). The researchers indicate that individuals who identify as upper class are more likely to stay gainfully employed and utilize social connectionsto maintain their status.…”

Skills, education, and the rise of earnings inequality among the “other 99 percent”

“…These include the fall over several decades in the real value of the U.S. minimum wage (7); the declining prevalence and bargaining power of U.S. labor unions; mounting international competition that places particular pressure on the wages and employment of less-educated workers; and sharp reductions in top federal marginal tax rates that have raised after-tax inequality and increased the incentive of highly paid workers to seek still higher compensation. As discussed in the companion paper by Piketty and Saez, there is also significant disagreement among economists about whether the rising share of household incomes accruing to the top few percentiles of households in numerous developed countries over the last several decades is also primarily a market phenomenon, or, instead whether it reflects changing social norms, growing corporate misgovernance, slackening regulatory oversight, or increasing political capture of the policymaking process by elites (3)(4)(5)(6). It would therefore be a vast overstatement to conclude that the rise of U.S. inequality is exclusively due to conventional market forces, or that public policy has not played a role.…”

“…In the U.S. for example, approximately two-thirds of the overall rise of earnings dispersion between 1980 and 2005 is proximately accounted for by the rising returns to schooling-primarily the growing premium to postsecondary education. (1, 2) Second, while there is as yet little consensus among economists regarding the primary causes of the rise of very top incomes, (3)(4)(5)(6) an influential literature finds that the interplay between the supply and demand for skills provides substantial insight into why the skill premium has risen and fallen over time-and, specifically, why the earnings gap between college and high school graduates has more than doubled in the U.S. over the last three decades. A third reason for focusing on the skill premium is it offers broad insight into the evolution of inequality within a market economy, highlighting the social value of inequality alongside its potential social costs and illuminating the constructive role for public policy in maximizing the benefits and minimizing the costs of inequality.…”

Divide and rule: redistribution in a model with differentiated candidates

“…Yet, in contrast with the predictions of economic theory of democracy (Downs 1957) that the democratic process will eventually reflect the preferences of the majority, rich voters' preferences for less redistribution seem to be better represented. As many observers note (e.g., Bonica et al 2013), while the majority of voters has become poorer (in relative terms) one does not observe majority's preferences over taxation and redistribution being met by politicians (Fig. 1).…”