A new insight into economic inequality and governance

Inequality can affect how the U.S. economy functions in a variety of ways. High levels of wealth inequality may change how consumers respond to recessions. Unequal household incomes might hinder low-income children’s development of important skills and talents. Or perhaps high inequality might interact with the U.S. political system to distort governance and produce negative outcomes for the U.S. economy.

Political polarization—the growing divide between Republicans and Democrats, conservatives and liberals—has been at the center of many investigations related to rising economic inequality. And a new paper shows that higher levels of income inequality cause more political polarization among state legislators. Economist John Voorheis of the University of Oregon and political scientists Nolan McCarty of Princeton University and Boris Shor of Georgetown University claim to show a causal relationship between income inequality and political polarization at the state level.

Political polarization, of course, is one of the defining characteristics of U.S. politics. Since the mid-1970s, the divide between the Democratic and Republican parties has increased, according to analysis of votes in the U.S. House of Representatives and the Senate. This polarization has been “asymmetric,” in that the parties have not moved the same distance away from each other—Republicans have moved more to the political right than the Democrats have moved to the political left.

Previous work has shown a correlation between rising inequality and increasing polarization at the national level. But it didn’t show a causal relationship. The new paper by Voorheis, McCarty, and Shor uses a so-called instrumental variables technique, a method economists often use to determine causal relationships, to show higher income inequality is causing increased polarization within state legislatures. (Their paper was funded in part by an Equitable Growth grant.)

The authors show that state-level income inequality has a much larger effect on Democratic state legislators, in contrast to what you might expect from the national trend. The causal effect significantly pushed the median member of a state’s Democratic Party to the left ideologically, while the median ideology of state legislatures moved to the right due to a higher share of Republicans in these legislatures. The paper’s authors interpret this finding as showing a retreat of moderate Democrats as Republicans advanced.

Political polarization in and of itself is not necessarily a bad thing. But in conjunction with the U.S. political system and its myriad checks and balances, the result can be gridlock unless one party has large majorities in both chambers of Congress and a president in the Oval Office. Gridlock hinders policymakers’ ability to take action on a variety of issues, both long-term and short-term.

Of course, as should be said with all working papers, these results are preliminary and subject to revision. And this research is the first of its kind. But the results are quite interesting. Inequality might not only be the result of public policy created by the political system, but it may also feed back into the political system that creates policy.