Paul Krugman: Wages, Wealth and Politics

Paul Krugman looks at an interesting association between the political ideology of the party in power and changes in inequality:

Wages, Wealth and Politics, by Paul Krugman, On Inequality, Commentary, NY Times: Recently, Henry Paulson, the Treasury secretary, acknowledged that economic inequality is rising in America ... he also conceded that this might be cause for concern.

But he quickly reverted to form, falsely implying that rising inequality is mainly a story about rising wages for the highly educated. And he argued that nothing can be done about this trend... History suggests otherwise. ...

Since the 1920’s there have been four eras of American inequality:

• The Great Compression, 1929-1947: The birth of middle-class America. The real wages of production workers ... rose 67 percent, while the real income of the richest 1 percent of Americans actually fell 17 percent.

• The Postwar Boom, 1947-1973: An era of widely shared growth. Real wages rose 81 percent, and the income of the richest 1 percent rose 38 percent.

• Stagflation, 1973-1980: Everyone lost ground. Real wages fell 3 percent, and the income of the richest 1 percent fell 4 percent.

• The New Gilded Age, 1980-?: ...Between 1980 and 2004, real wages in manufacturing fell 1 percent, while the real income of the richest 1 percent ... rose 135 percent.

What’s noticeable is that except during stagflation, when virtually all Americans were hurt by ... oil prices, what happened in each era was what the dominant political tendency of that era wanted to happen.

Franklin Roosevelt favored the interests of workers while declaring of plutocrats who considered him a class traitor, “I welcome their hatred.” Sure enough, under the New Deal wages surged while the rich lost ground.

What followed was an era of bipartisanship and political moderation; Dwight Eisenhower said of those who wanted to roll back the New Deal, “Their number is negligible, and they are stupid.” Sure enough, it was also an era of equable growth.

Finally, since 1980 the U.S. political scene has been dominated by a conservative movement firmly committed to the view that what’s good for the rich is good for America. Sure enough, the rich have seen their incomes soar, while working Americans have seen few if any gains. ...

Now, this chronology doesn’t prove that politics drives changes in inequality. There were certainly other factors at work... But it seems likely that government policies have played a big role in America’s growing economic polarization — not just easily measured policies like tax rates for the rich..., but things like the shift in Labor Department policy from protection of worker rights to tacit support for union-busting.

And if that’s true, it matters a lot which party is in power — and more important, which ideology. For the last few decades, even Democrats have been afraid to make an issue out of inequality, fearing that they would be accused of practicing class warfare and lose the support of wealthy campaign contributors.

That may be changing. Inequality seems to be an issue whose time has finally come, and if the growing movement to pressure Wal-Mart to treat its workers better is any indication, economic populism is making a comeback. It’s still unclear when the Democrats might regain power, or what economic policies they’ll pursue when they do. But if and when we get a government that tries to do something about rising inequality, rather than responding with a mixture of denial and fatalism, we may find that Mr. Paulson’s “economic reality” is a lot easier to change than he supposes.

_________________________
Previous (8/14) column: Paul Krugman: Hoping for Fear
Next (8/21) column: Paul Krugman: Tax Farmers, Mercenaries and Viceroys

Comments

[Bruce Wilder]

"it matters a lot which party is in power"

can we say, duh?!?

[Winslow R.]

“• Stagflation, 1973-1980: Everyone lost ground. Real wages fell 3 percent, and the income of the richest 1 percent fell 4 percent. “

I'd like to see this article tied in with the Mankiw letter in reference to money (near money) creation.

The 1973 to 1980 period was a time of falling prosperity for the domestic sector as everyone rich or poor paid more for commodities. The income gain went to the commodity producing foreign sector.

What provides the ability of the commodity producing foreign sector to extract gains from the U.S. domestic sector? Is the trigger excessive demand for commodities (Japan now China) or was it the Yom Kippur /Vietnam War in 1973 and Iraq War in 2003?

The commodity producers were eventually 'conquered' by Paul V. Was Volcker responsible for the shift in power from commodity producers to commodity consumers as he slowed the economy to a screeching halt rather than transferring power from labor to capital which we were led to believe was needed? Was labor really 'the problem' considering real income was falling across the board?

Apparently the 'real problem' was the creation of a powerful economy with sufficient surplus capacity to supply war mongers the resources to search and destroy various hapless victims. Once the war mongers victims became the commodity producers the true struggle began.

Is the outcome of the current struggle ready to be influenced by the actions of a central banker. My feeling is the tools of the CB are in a weakened state due to wealth inequality. The CB is dependent upon the political support of a majority of the electorate. The late 70's, with its broad distribution of wealth was economically prepared to weather a sufficient downturn in the 80's. Today the pain inflicted on the lower rungs may be so concentrated as to cause a political break down in the ability of the CB to slow the economy sufficiently to break the control of the commodity producers/speculators as well as war mongers.

Wealth consolidation weakens the Fed's ability to fight inflation.

[Blissex]

«My feeling is the tools of the CB are in a weakened state due to wealth inequality. The CB is dependent upon the political support of a majority of the electorate.»

Sure, of the electorate, not of citizens or residents.

«The late 70's, with its broad distribution of wealth was economically prepared to weather a sufficient downturn in the 80's.»

Here I suspect there is a confusion between wealth and income: in the 70s there was a more equal distribution of income, not assets. The story in the past 10 years is that inequality of income has increased a lot.

Now as to the distribution of wealth two things have changed: huge fortunes have become huger, but also many more people have acquired some wealth, usually in the form of real estate.

In the 70s home ownership was a lot lower than now, in part because Republican think tanks had not discovered yet that home ownership makes people vote conservative (actually the discovery was made by an English Tory think tank).

«Today the pain inflicted on the lower rungs may be so concentrated as to cause a political break down in the ability of the CB to slow the economy sufficiently [ ... ]»

I think this is wistful. There have been some big changes... A crucial number is that 70% of households own real estate, quite a few own stock, and only 50% of citizens vote, the better off 50%, and among these almost all own real estate and IIRC a majority own stocks.

If the central bank kills the economy to crush inflation the big losers will be the non-voting immigrants, illegal or legal, and the non-voting lower income citizens, which are a minority of the population and not very important electorally.

And concentrated pain is a lot better than diffuse pain in any electoral calculation.

All these minority groups matter very little in politics, unless they riot. And they won't riot, at least in America.

The real problem is not lower income workers being hit disproportionately by a Volcker Squeeze: it is that impact of higher interest rates on the mass wealthy.

Many of those proud conservative home owners don't have much equity in their homes, and even those who do may find it hard to sell them if mortgage rates shoot up. A particularly scary example:

http://WWW.BusinessWeek.com/investor/content/aug2006/pi20060815_087285.htm
«Robert Boyce, a factory worker in Miamisburg, Ohio, refinanced his home four years ago at what he felt was a manageable rate of 7.5%. Today he must pay 9.5%, and, under the terms of his mortgage, the rate could jump to 11.5% in December and 13.5% next year. He says that because of high closing fees and an overambitious appraisal by the lender, his mortgage is now more than what his house is worth.»

Never mind all those stock owners who would see their stock collapse as their P/Es sink because of the end of the Greenspan Put:

http:/WWW.beearly.com/pdfFiles/PIMCO092005.pdf
http://WWW.PIMCO.com/LeftNav/Late+Breaking+Commentary/FF/2005/FF+September+2005.htm
«[6] I attempted to put a value on the Greenspan Put in the February 2000 Fed Focus, "Me and Morgan le Fay", writing that without the Put, the P/E for the S+P 500 should be 18, not 32.»

My personal guess is that if Bernanke tries to turn the Greenspan Put into a Volcker Squeeze it will be the majority of stock and mortgage owners (and the Treasury) that will scream, and they are a lot more politically influential than the nearly insignificant lower classes.

[Robert]

It is fascinating that as Blissex points out,(and a view to which I am sympathetic) "the Volcker squeeze" is well-nigh impossible because it will [temporarily] impoverish much of the polity, and therefore is politically untenable and highly unlikely. Yet ironically Bruce Wilder points out that precisely the same polity was more or less uniformly impoverished by 70's stagflation. I believe the markets will deterministically do what the authorities in the USA are not able to countenance. Moreover, as a result of the authorities predicament, the dislocation and adjustment will be more drawn out, and probably more severe, because at present, the authorities are not only shirking from their responsibility to protect the future, but are actively working against the markets, in the opposite direction, encouraging and facilitating the borrowing of every dollar from future growth & consumption that they can muster. One should fight the battles one can win within reasonable probability, but if one spend all of one's ammo fighting an ultimately losing battle, one is likely to find oneself an in indefensible position, with no ammo, and no route of espcape...

[Blissex]

"it matters a lot which party is in power"
«can we say, duh?!?»

But I think this is quite wrong or at least misleading.

Those who bore themselves reading my comments may have noticed that one of my themes is that politics drive the economy (not uncommon: Soros says the same), and that my impression of the same periods of time is deceptively very similar to Krugman's.

Because my impression is that while it does matter which party is in power, because parties sometimes lead the voters, and in any case enact the details, usually it matters a lot less than which ''ideology'' is prevalent, because it happens far more frequently that parties adapt to public opinion, rather than lead it, especially in the USA where politicians will say whatever it takes, because party discipline is low.

And what has happened is that the culture of the ''country'' (the body of voters) has shifted to the right, in part thanks to the self-disgrace of the left (union abuses, McGovern), in part because of clever social engineering by conservatives.

In the 50s and 60s etc. inequality of income was not as high because both Republicans and Democrats shared a progressive consensus, not because the Democrats were in power. Perhaps the consensus was based on keeping the home front happy during the Cold War, or whatever else, but there was a progressive consensus.

Krugman has discovered partisanship, but that I think is in this case a shallow argument compared to things like rise in home ownership and average age of voters.

Consider Eisenhower and Clinton: both triangulators, one a progressive Republican in a period in which you had to be progressive to win elections, the other a conservative Democrat in a different period in which you have to be conservative to win elections. Similarly in the UK with MacMillan and Blair.

Belatedly I have just finished (and rereading) "The Right Nation" by Micklethwait and Wooldridge. It has a good history of how a changed cultural landscape has driven the changes inside the two parties. I wish they had given more prominence to crude factors like home ownership; after all the UK has seen a similar cultural shift to the right in the same timeframe, but in the UK factors like religion and abortion and guns have played no role. I think that home ownership and the aging of voters in both countries are the common factors.

BTW, I just discovered this fascinating (and otherwise famous) series of political and population maps:

http://WWW.Princeton.edu/~rvdb/JAVA/election2004/

[Nels Nelson]

It seems to me that Krugman is reminding us of the famous saying by Keynes about the ideas of economists and political philosophers being more powerful than commonly understood.

Economics is performative and comes from the notion of a "performative utterance": one that makes itself true by being uttered. Economics is performative in the sense that it performs the economy. Economics does not describe what exists but brings into being what it describes.

[save the rustbelt]

"...But he quickly reverted to form, falsely implying that rising inequality is mainly a story about rising wages for the highly educated...."

To be fair, that argument started with the Clintonistas.

"...Between 1980 and 2004, real wages in manufacturing fell 1 percent,..."

Krugman should look in the mirror on this one, he is a booster of "more trade at all costs." And he should remember who was President when NAFTA was passed.

[reason]

Nels Nelson...
Huh?

This may have been true for Keynes in an age when famous media-savvy Economists were rare, but does it still have relevance? And how does it relate the topic exactly?

[realpc]

"Between 1980 and 2004, real wages in manufacturing fell 1 percent, while the real income of the richest 1 percent ... rose 135 percent."

Ok, inequality is increasing. But why does Krugman constantly resort to deceptive/misleading statements? Manufacturing wages only feel 1 percent, not much, but they did fall, and he contrasts this with the huge increase for the very rich.

But why does he deliberately fail to meniton the gains of the middle class during this period? Because he wants to exaggerate the contrast.

And how exactly does conservative ideology cause soaring incomes for the top 1 percent? The crazed desire to attract superstars is not tied to conservative ideology, is it? The same thing happens in movies and recording (not considered conservative industries) and in sports, not just business.

Krugman wants to see things a certain way, so he freely twists the data.

Does contemporary conservative ideology promote class differences? Or does it promote middle class prosperity?

Progressives often assume that conservatism has not changed, that it still longs nostalgically for the days of agricultural aristocracy.

[Nels Nelson]

Reason,

Maybe Robert Heilbroner can help me out.

The following is from The Worldly Philosophers:

"We live in a period in which much of the conventional wisdom of the past has been tried and found wanting. Economics is in a state of self-scrutiny, dissatisfied with its established premises, not yet ready to formulate new ones. Indeed, perhaps the search for a new vision of economics, a vision that will highlight new elements of reality and suggest new modes of analysis, is the most pressing economic task of our time."

and were an economy not based upon scarcity and acquisitiveness:

"Perhaps in a different society of the future, another hypothesis about behavior would have to serve as our starting point. People might then be driven by the desire to better the condition of others rather than themselves.

"A story about heaven and hell is to the point. Hell has been described as a place where people sit at tables laden with sumptuous food, unable to eat because they have three-foot long forks and spoons strapped to their hands. Heaven is described as the very same place. There, people feed one another."

[TwentyOne]

Echo one of Blissex's points.

Elected officials matter, but probably the prevailing collective wisdom is more important.

Cold war mentality included the notion that domestic harmony and social progress were important. The fight against Islamofascists, as defined by conservatives, does not; and perhaps if anything, it embodies the notion that not only do we not have to appease our lower classes, but that it is OK for the US military to suppress uprisings in the oil patch, that is, appeasing diplomacy is not necessary at home or abroad.

That, perhaps, driven by the globalized economy. Resources and consumers should be accessible to multinational corporations; and resistance should be suppressed with military intervention if necessary.

Not sure if I buy that, but food for thought.

[save the rustbelt]

"....And how exactly does conservative ideology cause soaring incomes for the top 1 percent?...."

ACtually it is not conservative ideology, it is crony capitalism, especially as practiced by the Bush administration.

In case you haven't noticed, Bush is not a conservative.
Krugman needs to update his terminology.

[anne]

George Bush is the essence of conservatism and has been stunningly successful in implementing conservative wishes, with the exception being slashing away Social Security though as mentioned in signing the Pension Bill yesterday slashing Social Security is still a dream. Simply look to the structure of taxes now and taxes in 2000, and there is essential love the wealthiest-the heck with the rest conservatism.

[RW]

Although he was speaking specifically to Yuppies -- the young, upwardly mobile entrepreneurial types -- John Kenneth Galbraith's comment easily translates to that group of better-off individuals that most conservatives seem to be referring to when they speak of the middle class:

"You will belong to that minority which, according to current Washington doctrine, must be protected in its affluence lest its energy and initiative be impaired. Your position will be in contrast to that of the poor, to whom money, especially if it is from public sources, is held to be deeply damaging."

You do not foster growth in the middle class by smoothing the road for those who have already reached that destination while allowing the return of wilderness to the fields where it germinates and requires most care.

[Dirk van Dijk]

"But why does he deliberately fail to menition the gains of the middle class during this period? Because he wants to exaggerate the contrast."

What gains for the middle class? Real median median wages have not gone anywhere for forever. The median wage is far and away the best measure of the middle class.

The rising returns to education hypothesis could explain why the top decile is doing better than say the 5th or 6th decile. However, the vast majority of the increase in the share of total national income for the top decile has come from gains in the top 1%. Not that much increase for folks in the 90-95% area. I would presume that those folks are pretty well educated.

[anne]

Yes; the real median wage has fallen for 5 years now, and will almost certainly have fallen in year 6. This is not a healthy sort of growth, but the idea that labor organization might help if it were allowed to strengthen is not entertained. Increasing the minimum wage is not so dramatic a step, but to tie the increase in the minimum to a further reduction in the dreaded "death" or "kill-granny-now" tax is a bit much.

[Winslow R.]

Blissex:

"Here I suspect there is a confusion between wealth and income: in the 70s there was a more equal distribution of income, not assets. The story in the past 10 years is that inequality of income has increased a lot."

The charts I've seen indicate both wealth and income have become more concentrated with income/wealth distribution maxing in the early/late 70's.

See p. 123 (wealth) and p. 128,427 (income) in Kevin Phillips Wealth and Democracy.

Blissex wrote:

"If the central bank kills the economy to crush inflation the big losers will be the non-voting immigrants, illegal or legal, and the non-voting lower income citizens, which are a minority of the population and not very important electorally."

and then wrote:

"The real problem is not lower income workers being hit disproportionately by a Volcker Squeeze: it is that impact of higher interest rates on the mass wealthy. "

Your definition of 'mass wealthy' includes my 'lower rungs'.

The question is, how much commodity consumption/storage is due to the upper vs. lower rungs of the economic ladder. Does external demand (China) even play a role? Currently with various pension funds/speculators (upper rungs) investing in (storage of) commodities the upper rungs have the upper hand on demand/pricing. In addition Saudi Arabia has been accused of withholding supply to keep prices stable in the high 60's/low 70's. How much pain (Volcker squeeze) must be inflicted to break their grip? Can the grip be broken before the lower rungs (not just immigrants) drop their political support for Fed tightening?

If the grip cannot be broken (the Mankiw letter tie in) before 'near money' creation comes to halt, 'real money' creation by the federal government will need to replace it as in Japan. Would Bernanke risk making the CB ineffectual as in Japan? I don't think so. Not intentionally.

Volcker not only had broader wealth distribution but also higher interest rates with plenty of room above the zero bound to play. Low long term interest rates seem to be tied to wealth concentration in those tied to the government spigot. In order for Japan to shift long term rates higher requires a shift in money flows from those currently tied to government as they just 'save' the newly created money. The same could become true (and easier) in the U.S. as at least in theory we have a functioning two party system (unlike Japan).

[Bruce Wilder]

Years ago, the political scientist, Harold Lasswell titled his book: "Who Gets What, When, How"

The distribution of income and wealth are political questions.

People, who imply that they are not political questions, are fools or liars.

The two American political parties have not, historically, been sharply divided ideologically, though they have become much more so, since the 1960's. Nor has the center of policy gravity been the same in either party over time. But, the division of the body politic between the Parties has meant that class interests have divided between the Parties, and the Democrats have represented urban interests and labor interests since the late 19th century, and since 1960, the Democrats have represented racial minorities and, increasingly, liberal ideology. Republicans have been representing the interests of big business as long as there has been big business.

In World War I, the American economy was turned, briefly, into a command economy by Woodrow Wilson. Real wages rose 50% in the course of 18 months, as decades of labor strife ended in complete victory for labor. After World War I, the country returned to "normalcy": Andrew Mellon, one of the richest men in the world (Gulf Oil, Alcoa, Mellon Bank, etc.), became Treasury Secretary to three successive Republican Presidents, and presided over a boom, which benefitted mostly the very rich. Krugman covered the rest.

The distribution of income and wealth in society is tied directly to the distribution of risk and insurance. FDR built up institutions of social insurance, which became the foundation for the American middle class: labor laws that favored unions, unemployment compensation, a minimum wage, social security, the GI Bill, schemes to subsidize home ownership, etc. Those were the means by which income and wealth distribution was skewed in favor of the great middle class. Republicans have fought continuously to undermine those schemes. And, post-Reagan, Republicans have succeeded to a large degree, and predictably enough, middle class families have been subjected to a great deal more risk -- i.e. greater income volatility -- and the distribution of income and wealth have swung in favor of the very rich.

The one really novel thing, since Reagan, has been the role of the top corporate executives. Top pay for corporate executives has risen precipitously, and has figured prominently in skewing income distribution as a whole. That corporate executive class has become the financial backbone of the Republican Party, both directly and thru their minions on K street.

None of this is exactly subtle, nor should any of it be obscure to anyone. It plays out in countless policy choices, large and small, broad and detailed, from how the the SEC and NLRB and FCC and FDA and EPA are run, to proposals for phasing out Social Security and war in the Middle East.

It is readily apparent in economic statistics, if you are not wilfully blind. The unemployment rate is consistently higher under Republican Presidents, except in election years. Even when a Republican manages to bring the nominal unemployment rate down, as Bush has done, it is (surprise!) in a context of falling real wages. Look at a chart of unemployment under Clinton, and you will see a steady decline; look before and after, and you will see wild gyrations.

The only thing that surprises me about Krugman's column or the discussion afterward, is that there should be the slightest controversy or surprise regarding the main thesis. The distribution of income and wealth are political issues; the Parties have been, consistently, on opposite sides of those issues regarding the distribution of income and wealthy for over a century. Hello! Which Party is in power matters.

[billy]

'save the rustbelt' wrote

>In case you haven't noticed, Bush is not a conservative.
>Krugman needs to update his terminology.

Say this slowly..

-Bush is conservative.
-What Bush is doing is conservatism in action.
-Conservative control all three branches of government. This is
as good as conservatism gets.

Contemplate on those points till you get them. OK?

All I see is conservatives running away from the fruits of conservatism.

Hey, what happened to that fundamental conservative virtue of "responsibility"?

Conservatism is not responsible for what it has produced?

Not responsible for whom the conservatives voted into power these last 6 years?

Not responsible for their policies that were blindly and ruthlessly supported without question?

Not responsible for the tarring and crushing of anyone who questioned those policies?

You say, you conservatives are not responsible? I say you are no conservative - a conservative owns up.

[anne]

Billy:

"-Bush is conservative.
-What Bush is doing is conservatism in action.
-Conservative control all three branches of government. This is as good as conservatism gets."

Precisely.

[anne]

http://delong.typepad.com/sdj/2006/08/the_primacy_of_.html#comments

August 20, 2006

Brad DeLong:

The Primacy of Politics for Income Distribution?
The problem that I have with Paul Krugman's argument here is that the shifts in income inequality seem to me to be too big to be associated with anything the government does or did. Yes, Roosevelt and company were pushing in the right direction. Yes, Reagan, Gingrich, Bush, and company have been pushing in the wrong direction. But what they did and do affects (I think) after-tax income inequality much more than the before-tax income inequality numbers, and the before-tax numbers show the trends remarkably strongly. And I can't see the mechanism by which changes in government policies bring about such huge swings in pre-tax income distribution.

[anne]

http://delong.typepad.com/sdj/2006/08/the_primacy_of_.html#comments

August 20, 2006

Dean Baker:

Brad,

Anyone who wants to attribute the growth in pre-tax income inequality to the birds and the bees (i.e. the natural workings of the market) has a strong hurdle to overcome in explaining why Europe has not seen a similar growth in inequality. (It's productivity growth and EPOPs are not that different from the U.S., so don't try a "failed Europe" story.)

There are a large number of ways in which the government sets policy that determines whether income flows upward or downward. For example, Bill Gates is the richest man in the world because the Bush I-Clinton administrations allowed him to pursue blatant violations of anti-trust law in order to gain a near monopoly on the market for operating systems.

Of course, patent and copyright monopolies come from the government, not the market. The fact that the U.S. gives drug companies patent monopolies, and then lets them charge whatever they like for their drugs (unlike Europe, which has price controls), makes shareholders in drug companies and their top execs very rich, and everyone else somewhat poorer.

The rules of corporate governance are also set by the government. (Remember, corporations are creations of government, not nature.) In the U.S., top executives have abused their positions of power to write themselves huge paychecks. This has brought no response from the government to adjust the balance of power between top execs and other stakeholders.

Finally, the U.S. has quite consciously pursued a trade and immigration policy that is intended to put downward pressure on the wages of the bulk of the workforce, while protecting doctors,lawyers, and other highly paid professionals (including economists).

I think a very compelling case can be made that the upward redistribution of before tax income was the result of conscious policy, not an accident of nature.

[anne]

http://krugman.page.nytimes.com/b/a/257971.htm

August 18, 2006

The Income Gap Is Real

Paul Krugman: There are real questions about just how closely supply and demand determine wages; the labor market isn't just like the market for wheat. Also, there's a lot of evidence that unions have a large effect on the wages of non-union workers, too. When you're in an economy in which about a third of private-sector workers are unionized, as was true of the United States when I was growing up, even non-union employers tread carefully, for fear of giving their workers a strong incentive to organize. When you're in an economy where unions have been largely banished from the private sector, as is the case now, things are very different.

Just a note for the truly wonkish among my readers: why did I use the particular statistics I did? The answer is data availability.

If you're only looking at the last few decades, you can use a number of measures of income inequality; that's because these days the federal government carries out surveys that yield a lot of information about who earns what. But I wanted to take a longer sweep, and the surveys didn't exist before about 1947 at the earliest.

What we do have, however, are data on manufacturing wages, collected by pioneering economic statisticians, and data on the income of the richest Americans, collected as a byproduct of the income tax, which was introduced -- but only for the rich -- in 1913. In modern data, the difference between growth in manufacturing wages and growth in the income of the top one percent closely tracks more comprehensive measures of inequality. And using that comparison I can extend the discussion back far enough to cover the great equalization of income that took place under the New Deal.

And that's important. I think the story of how income gaps narrowed under F.D.R., stayed relatively modest for several decades, then returned to Great Gatsby levels of inequality over the last quarter century, is the key to understanding a lot of what happened to America. So we really need to learn from the past, and not assume that the way things are right now is the way they have to be.

[Andrew Gelman]

I recommend taking a look at Larry Bartels's paper on the topic; see here:
http://www.stat.columbia.edu/~cook/movabletype/archives/2006/04/larry_bartels_o.html
Larry made a pretty graph.

I agree that there are sample size issues here, but Larry is telling a coherent story, I think. See here for my further comments:
http://www.stat.columbia.edu/~cook/movabletype/archives/2006/04/more_on_larry_b.html