New York Fed economists think there may be a correlation between two problems currently plaguing the U.S.: extreme political polarization and income inequality.
Rajashri Chakrabarti, senior economist in the Federal Reserve Bank of New York’s Research and Statistics Group, and Matt Mazewski, a research analyst in the same group, plotted the relationship between polarization and income inequality from 1913 to 2012.
They noticed that the two measures follow similar trajectories: during the first half of the 20th century, the left-right political divide and income inequality decrease over time, while during the second half both increase over time.
However, although the two measures take similar paths, you can see in the chart above that the inequality measure (in blue) lags several years behind the shift in polarization (in red).
Considering the fact that inequality follows polarization, Chakrabarti and Mazewski note that polarization itself "may not be as important" as the way in which polarization unfolds. In other words, what emerges from a very polarized Congress is more important than the fact that Congress is polarized.
They offer several examples of how polarization might affect inequality. The most notable is "policy drift" which is when "outdated or ill-suited" policies remain in effect because of a political stalemate. Unfortunately, policy drift often "contributes to legislative gridlock", a time period during which it is difficult to pass new laws because two political parties are evenly divided and cannot agree. This effect prevents new and possibly better suited policies from being implemented.
An example of this effect can be seen with policies that are not indexed to inflation. Some policies benefit high earners, such as the income tax structure, while others benefit low earners, such as the federal minimum wage.
Chakrabarti and Mazewski also suggest weaker financial regulations may be a second result of how increasing polarization can affect inequality. "Asymmetric polarization" that is caused by the political center of gravity moving to the right often leads to looser finance laws. This effect causes incomes among the wealthy to rise further, and subsequently, overall inequality increases.
It is important to remember that this study does not say that polarization leads to income inequality, but rather that there is a correlation between the two.
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