Academic journal article Political Research Quarterly

Partisan Politics, Financial Deregulation, and the New Gilded Age

Academic journal article Political Research Quarterly

Partisan Politics, Financial Deregulation, and the New Gilded Age

Article excerpt

The gap between the rich and the poor in America has been far from constant over time. At the low water mark in the mid-1970s, the top 1 percent of U.S. tax units had nearly 9 percent of total national income. The picture today is different. Now, the top 1 percent have around 20 percent of aggregate income (Piketty and Saez 2006).1 The situation has become sufficiently stark to attract the attention of politicians ranging the ideological spectrum. Democrats from Barack Obama to Elizabeth Warren and Bernie Sanders seem to be talking about economic inequality and its potential negative ramifications for America's economy more than ever. On the other side of the political spectrum, several Republican presidential candidates have conceded that economic inequality is a serious problem and have begun to lay out their preferred policies for combating it. But identifying the proposals most likely to reduce inequality requires a clear understanding of the factors that push inequality up and down, and such an understanding should be based in the best possible evidence and analysis.

In the growing literature on income concentration in the United States, one of the emerging themes is the role of politics and the myriad ways that government intervenes in the economy (Bartels 2008; Enns et al. 2014; Hacker and Pierson 2010; Volscho and Kelly 2012). In this paper, we build on and connect several strands of literature related to the effects of partisan politics and policy decisions on economic inequality. Although there is substantial agreement that political factors have important distributional consequences, there is less agreement about the precise policy mechanisms that link politics to inequality. Those focusing on government's role in shaping income inequality have emphasized redistribution (Danziger and Gottschalk 1995; Kelly 2004). More recently, scholars have brought attention to "market conditioning," or how government structures the economic rules of the game (Kelly 2009). Examples of such policies include corporate regulation, public education programs, minimum wage laws, and environmental regulation (Page and Simmons 2000). This line of research has provided empirical support for the idea that political dynamics shape income inequality via market conditioning by showing that shifts in the partisan and ideological composition of policymaking institutions are associated with shifts in market inequality measured prior to the effects of taxes and transfers (Hacker and Pierson 2010; Kelly and Witko 2012; Morgan and Kelly 2013).

However, existing research has rarely specified tests that identify which, if any, of the proposed market conditioning policies actually link left-right political dynamics to pretax and transfer income inequality. Here, we build on recent studies placing a spotlight on the role of the finance sector in rising inequality (Philippon and Reshef 2012; Tomaskovic-Devey and Lin 2011; Witko 2015) and examine regulatory policy in the financial sector as a market conditioning mechanism linking partisan politics to distributional outcomes.

Our second contribution examines whether the partisan effects on financial deregulation identified in the first portion of the analysis have been maintained over time. One important characteristic of American politics over the past several decades has been polarization. But within this context of general polarization, some have suggested the possibility of partisan convergence in certain domains (Hacker and Pierson 2010; Roy and Denzau 2004). Most relevant to our analysis, Hacker and Pierson (2010) argue that Democrats have converged with Republicans on policies related to distributional outcomes generally and market conditioning more specifically. Democrats and Republicans, then, may have converged in the domain of financial regulation even while general partisan polarization has increased. Here, we provide evidence for partisan convergence and then explore four potential explanations-the increased reliance of families on consumer debt, changes in the sources of campaign contributions, globalization, and the decline of unions. …

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