|Figure 1: Richest 1 Percent's Share of National Pretax Income (Excluding Capital Gains) (Based on Piketty and Saez)|
|Figure 2: Average Actual Tax Incidence for Top Incomes (Based on Piketty and Saez (2007))|
Anybody who still thinks the mainstream story of skills-biased technical change is a reasonable hypothesis is a feckless fop.
Given contract law and property law, government cannot leave the economy to itself. Policy has been driving increased inequality.
Another driver of increased inequality is a change in ideas and social norms. These include faulty ideas on corporate governance, incorrect theories of factor markets, and performative models of finance.
How did ideas that never had sound empirical and theoretical backing become dominant? Part of the explanation must be a propaganda campaign by vile reactionaries, including the suppression of progress in explaining actually existing capitalist economies.
There is an aspect of cumulative causation here. A smaller government is associated with more inequality. And more inequality is associated with the rich and powerful promoting an exploded and evil ideology.
Increased inequality also leads to failures in aggregate demand. A steadily growing economy needs a certain balance to be maintained. The consequences of the failure to maintain such a balance since the end of the post war golden age are all around us.
Jacob S. Hacker and Paul Pierson, "Winner-Take-All Politics: Public Policy, Political Organization, and the Precipitous Rise of Top Incomes in the United States", Politics & Society, V. 38 N. 2 (2010): pp. 152-204