On the politics of economic inequality

by David Jacobs

In a stunning reversal in the long but slow trend toward greater economic equality that began in the late 1920s and the start of the great depression, U.S. income differences began a sharp acceleration about 35 years ago. In a recent study co-authored with Jonathan Dirlam, I find that a national political shift best explains this reversal. After the effects of many alternative explanations are taken into account, the evidence from this study shows that the election of Ronald Reagan and the two subsequent Republican presidents who supported Reagan’s policies provide the strongest explanation for this reversal in the prior trend toward greater equality.

There is little scholarly agreement about the causes of the sharp expansion in income inequality that began during Reagan’s presidency. Most economists claim this growth in income differences took place because changes in technology made college educated employees more valuable. According to almost all economists, this shift meant employers had to pay their new technologically knowledgeable employees—who were skilled with computers—much more.

But there are some important problems with this account: While the earnings of college educated employees did grow in the 1980s, this growth soon petered out after the end of this decade. Yet economic inequality continued its rapid acceleration. The greatest increase in earnings and incomes since the late 1970s, moreover, occurred among already highly paid corporate and financial executives. These citizens with enormous earnings and incomes, however, probably are rewarded more for their political talents than for the technological skills they learned in college.

Two political scientists Jacob Hacker and Paul Pierson aptly summarize what probably is the most important difficulty with the educational account favored by economists. They write “American inequality is not mainly about the gap between the well educated and the rest…it is about the extraordinary pulling away of the very top. Those at the top are often highly educated, but so too are those below them who have been left behind…Only a very small slice of the new education elite has entered the new economic elite.”

What then does explain this extraordinary growth in income differences? Another quote summarizes the political account supported by the evidence in our study. According to James Hightower writing in 1987, “The economic agenda of the past seven years produced one of the quickest and most regressive redistributions of wealth in US history. For all of the impassioned rhetoric about removing government as a force in our financial affairs, the Reagan government injected itself more enthusiastically into the economy than any administration since Lyndon Johnson’s Great Society. Indeed, Reagan’s administration took so much money from the pockets of middle- and lower-income Americans and shoved it up to the wealthiest 10 percent in our society that a top-heavy structure now threatens to come crashing down on us.”

How did President Reagan and subsequent Republican presidents accomplish this shift? Unlike the prior more moderate Republican presidents since 1945 and presidents from the opposite party, Reagan successfully supported many policies that reduced the federal government’s regulation of economic affairs. Members of his administration deregulated financial markets. These deregulatory successes allowed businesses to engage in more profitable but financially precarious economic conduct with unfortunate later consequences that helped produce the calamitous 2008 recession. This deregulation increased the ability of corporate and financial executives to negotiate much greater stock benefits and salaries.

Reagan and his subsequent Republican Presidential allies weakened compensatory programs and other policies designed to protect less affluent workers from economic downturns and unemployment. Reagan and the two Republican Presidents that followed him also signed into law many changes in the tax codes that enhanced the after tax incomes of already quite prosperous Americans—which then helped increase their later incomes from investments. The net effect of all these alterations was considerable after tax increases in executive and investor economic rewards.

While the rewards for those at the top grew substantially during this period, what happened to people in the bottom half of the income distribution? Soon after he took office, Reagan underscored his intense aversion to unions by breaking the PATCO air controllers strike. In another sharp departure from tradition, Reagan selected National Labor Relations Board members—charged with regulating disputes between labor and management—who were hostile to unions. These appointments and his pointed response to the PATCO strike sent a clear message that Reagan and the other members of his administration might ignore employer unfair labor practices that undercut union endeavors in additional ways.

This weakening of unions had harmful effects on middle and lower income workers. Unions compress wage differences when they organize workplaces. And stronger unions help workers who are not union members because employers seeking to avoid the unionization of their work place pay their employees more.

Before the 1980s when they were much stronger politically, unions successfully lobbied for many public policies that increased the incomes of middle and low income families. Additional findings in a prior study I co-authored with Lindsey Myers indicate that these Reagan policies that undermined unions contributed to the near stagnation in the buying power of families at or below the middle of the income distribution since the 1980s.

In short, the deregulation of economic and financial activities along with changes in the tax codes and the deregulation of labor markets that advantaged employers but hurt their employees produced this acceleration in the growth of income differences that occurred during and after Reagan’s presidency.
The results in our two studies on the determinants of income inequality support these inferences. After the effects of many competing expla­na­tions are removed, the findings in these investigations suggest that the combined Rea­gan and the two Bush administration policies led to substantial increases in income differences before taxes.

In addition to this evidence, reflections on the strength of political influences on economic inequality suggest this political account is realistic. As others have pointed out, even markets that appear to be politically unregulated in reality are closely controlled by political regimes. In addition to many other critical influences that are too numerous to list, political choices about taxes help decide differences in the economic rewards of haves and have-nots.

Along with taxes, governments determine access to the courts and the disputants who are advantaged after this access is granted. Governments closely regulate labor-management relations and personnel policies and they decide how enterprises are administered. Governments establish rules that control finan­cial and other transactions while supplying public goods like an educated work force and the roads, bridges, and waterways that are essential for economic activity.

Because these and many other political decisions combine to determine differences in the economic rewards of winners and losers, anyone who wishes to explain changes in economic inequality ignores politics at his or her peril. As markets by definition involve exchanges in control over property, and governments through legislation and the courts define these property rights, political influences cannot be removed from economic endeavors. A combined political-economic approach therefore is essential if we are to fully understand the forces that led to this momentous acceleration in economic inequality since the 1970s.

David Jacobs is professor emeritus in the Ohio State sociology department who studies the political economy of economic inequality and the politics of outcomes in the criminal justice system.