As the 2004 campaign begins in earnest, it appears the Democrats’ preferred strategy will be to tie a weak economy to President Bush’s economic policies. But what will they talk about if the economy gets strong? Several pieces in the New York Times suggest the answer: income inequality. The best example is a Times Magazine piece by Paul Krugman contending that we are entering a new Gilded Age as “extravagant as the original.” He recounts anecdotes of truly awe-inspiring wealth, of executives being treated like “royalty,” and reports that in 1998 the 13,000 richest families had about the same combined income as the 20 million poorest households. The data are pretty striking, and reveal that income is far more concentrated at the top than it used to be. What should one do about it? Yale’s Robert Shiller, writing in the Times op-ed section, proposed a law that would automatically increase tax rates on the wealthy if inequality increases.
Such drastic measures might be advisable if inequality were demonstrably harmful. But is it? I recently coedited (with R. Glenn Hubbard) a volume, Inequality and Tax Policy, that pulled together the leading research on the economics of inequality. One chapter in our book, contributed by Robert Barro of Harvard, found that inequality has a fairly unusual relationship with economic growth. If inequality is very high in a very poor nation, that country is likely to have low growth; but in wealthy, developed nations such as ours, economies have tended to do better when inequality is higher. And there is certainly no evidence that inequality results in political upheaval in such democracies: If we gave Bill Gates an extra $50 billion, it would not have a predictable effect on the typical voter’s life.
Comments