The Not So Common Factors Behind Inequality

Allan Meltzer claims that the rise in inequality within the US mirrors the rise in other countries, and therefore whatever is causing it can't be unique to any subset of them. Daron Acemoglu and James Robinson explain why that claim does not stand up to the evidence:

Is the one percent the same everywhere?, by Daron Acemoglu and James Robinson: Allan Meltzer’s article raises a lot of interesting issues. The main argument is that top one percent has increased its share of national income pretty much everywhere, and this underscores that the causes of this trend should be sought in global trends. It is true that there have been important global trends... None of this is (very) controversial.

But Meltzer claims more than this — that these trends account for the increase in share of the top one percent in the US. This is much more controversial. First, the book on the share of the top one percent, has been written by Anthony Atkinson, Thomas Piketty and Emmanuel Saez’s careful and painstaking work, see here. They show that the US — to some degree together with the UK — stands apart from others in terms of the extent of the increase in the share of the top one percent in national income. ... 

Second, cross-country differences are even more jarring when one looks at the bottom of the income distribution. ... There seems to be no equivalent of the [US] 40-year stagnation of median wages in Europe.

Third, it is not clear how the changes in the demand for skills explain the pay explosion for the very very rich. Have technological change and trade with China really increased the demand for the skills uniquely possessed by bond traders and Enron executives all that much?

In summary, there are significant cross-country differences in the trends in inequality, and it is far from obvious that all of these changes are explained by global trends. There is therefore a prima facie case that other factors — and yes, domestic and political ones — have also played a major role in increase in top inequality in the US. This theme is discussed in this interview, and we’ll return to it in another blog soon.