Did income inequality help cause the financial crisis? (Part 2)

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Justin lives! And he’s guest blogging for Ezra Klein this week. Check it out here. Yesterday he blogged about… whether or not income inequality helped cause the financial crisis. Sound familiar?

In addition to that blog post, Justin recently wrote this HBR piece in which he reviews the growing literature on the topic. He mentions the Raghu Rajan book I’ve talked about before, but he saves his highest praise for Winner-Take-All Politics, a new book by political scientists Jacob Hacker and Paul Pierson.

That work includes an interesting argument about the growing power of corporations. In the review, Justin writes:

The crucial turning point, [Hacker and Pierson] say, came not in 1980, when Ronald Reagan was elected, but two years before. The business community, reeling after years of labor victories and regulatory encroachments, had begun to organize over the course of the 1970s and focus its energy on politics. The Chamber of Commerce tripled its budget. The Business Roundtable and the American Council for Capital Formation were born. The first two big legislative wins came in 1978, when the Democrat-controlled Congress killed off a proposal to create an office of consumer representation and a union-backed revision of labor laws.

After that there was no turning back: Business groups had figured out how to work the new levers of power in Washington, while the mass-membership organizations that had represented working America—not just labor unions but also the likes of the American Legion and the Elks—fell into sharp decline.

The only caveat I’d add—based on dozens of interviews with small business owners over the past year or so—is that there is often a difference between policies pursued by groups like the Chamber of Commerce and policies that small companies and entrepreneurs would find most useful. We often talk about “business” as if that’s a monolithic group. It’s really not.

Justin’s article also does a nice job summarizing the quantitative evidence which leads us to talk about income inequality in the first place. Yesterday there was some questioning about whether income inequality was actually a thing in the world, or if people who didn’t make more money were simply lazy. I found this passage illustrative:

In the late 1970s, a 50-year trend toward more equal distribution of incomes in the United States was reversed. At first there was debate over the evidence, but by the 1990s economists of almost every stripe agreed that income disparity was rising. When President George W. Bush declared in early 2007 that “income inequality is real—it’s been rising for more than 25 years,” the matter seemed settled.