Wednesday, April 14, 2010

Policy is key

In the previous post I asked:

What changed in our economy, that brought about this 30-year change in the income gap? Short answer: Economic policy.

Comments on the previous post link to "Striking it Richer" by Emmanuel Saez.

In his PDF Emmanuel Saez writes:

Based on the US historical record, falls in income concentration due to
recessions are temporary unless drastic policy changes, such as financial
regulation or significantly more progressive taxation, are implemented and
prevent income concentration from bouncing back. Such policy changes took
place after the Great Depression during the New Deal and permanently
reduced income concentration till the 1970s.

Policy is key. Saez doesn't finish his thought and say that policy changes since the 1970s allowed income concentration to bounce back. But his Figure 1 shows the bounce. I've eyeballed-in trend lines to emphasize the timing of the policy change.

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