How much does government policy affect pre-tax income?

SA few days ago Paul Krugman argued (Times Select, or here is a Mark Thoma summary) that it matters a great deal which political party rules in the United States.  Republicans tend to bring gilded ages, Democrats tend to bring greater income equality.  So much for the median voter theorem (is this less reason or more reason to trust politics?  And is this view supported by event studies of elections?  I doubt it.).

Andrew Samwick points to Krugman’s own earning power and wonders if W. deserves the credit.  Greg Mankiw piles on.  Even Brad DeLong disagrees with Krugman.   

Matt ("he really ought to be an economist") Yglesias sides with Krugman, noting that tax policy affects pre-tax earnings through induced effort (an unexpected yet appropriate dalliance with the supply side) and how the workplace is geared to produce maximum value.

Four additional points:

1. It is much easier for policy to liberate a "shackled top 1 percent" and boost their earnings than it is for policy to lift the huddled masses.  See Mark Thoma on Australia.  Measures of inequality capture the difference between these two groups, but for Krugman’s questions this is not a helpful aggregation.  It is easier to toy with the lot of small groups than with very large groups.

2. Bob Tollison used to tell me: "No one other than Michael Jordan ever got truly rich selling his labor."  If policy is going to liberate top earners, look to the growth in capital markets.

3. Krugman doesn’t have many data points.  The 20s have a string of Republicans.  Then there is Roosevelt/Truman.  He tosses out Eisenhower for being centrist.  Nixon was like a Democrat on social spending and regulation.  Krugman tosses out Clinton for governing like a right-winger.  Give this one to Andrew Gelman and let him bite.

I’m OK with these classifications of Eisenhower and Clinton.  The deeper point is that how a party or president governs is itself determined by underlying social, economic, and technological forces.  Which brings us back to the political party not mattering very much for pre-tax income distribution.

4. If we take the left-wing view that money doesn’t make people much happier, and hard work is an oppressive rat race, the change in the distribution of utility is much much less than the change in the distribution of income.  In fact it is easy to argue that the United States has become more egalitarian in terms of well-being.  Most people get penicillin, and in utility terms a $20,000 stereo isn’t much better than a $400 stereo.

Addendum: Here is more Brad DeLong summary and analysis.


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