Macroeconomic Inequality From Reagan to Trump: Structural Shifts, Wage Repression, and Sectoral Duality

This podcast episode celebrates Lance Taylor and Özlem Ömer's book, "Macroeconomic Inequality From Reagan to Trump," which argues that the dramatic rise in inequality since the 1970s is not merely an outcome of exogenous forces but a result of fundamental structural changes in the U.S. economy. The central empirical finding is a striking break in the share of wages in GDP, which remained stable from 1929 to around 1970 but then entered a strong downward trend, indicating pervasive wage repression. This decline in labor's share corresponds to an increase in profit-like incomes (proprietor's income, rental income, corporate profits), which disproportionately accrue to the top 1% of the income distribution through financial transfers and capital gains, fueled by asset price inflation and low interest rates. The book posits that this structural shift created a "dynamo" for increasing profits at the expense of wages.

The authors distinguish their argument from conventional explanations, such as Thomas Piketty's R>G (rate of return on capital greater than economic growth rate), by emphasizing the structural nature of the economy's functional income distribution. They also challenge the notion that factors like financialization, immigration, globalization, automation, and casualization are simply inexorable, exogenous forces. Instead, they frame these as endogenous outcomes of political economy, shaped by policy choices and power dynamics. A key nuance is the identification of a structural duality in the U.S. economy, comprising "stagnant sectors" (e.g., construction, accommodation, food services, health, entertainment) characterized by slow or negative wage and productivity growth, and "dynamic sectors" (e.g., manufacturing, utilities, information, finance) with higher productivity but often significant job losses due to productivity outpacing demand.

The analysis offers practical insights into the mechanisms driving income inequality across different classes. The top 1% see their income largely from labor compensation (bonuses, stock options), proprietors' income, interest, dividends, and capital gains, with significant savings contributing to wealth accumulation. The middle class experiences stagnating incomes, primarily from labor compensation, with minimal capital gains and high consumption-to-income ratios. The bottom 60% rely heavily on transfer incomes and labor compensation, often consuming more than they earn, leading to negative savings. This creates a "huge squeeze" in the middle class. The shift from dynamic to stagnant sectors is identified as a major driver of overall employment growth, but at the cost of lower productivity growth for the economy as a whole and further wage depression for the bottom income classes.

The broader implications are significant, suggesting that the perceived injustice and political dissatisfaction in the U.S. are downstream effects of this deep-seated economic inequality. The discussion highlights the need for "new economic thinking" that moves beyond recycled ideas and addresses the structural roots of these problems. Discussants propose frameworks like Richard Freeman's "who owns the robots" or Dani Rodrik's industrial policy to shift profit sharing towards workers, particularly in anticipation of accelerating automation. The book serves as a critical correction to "wishful thinking" on the progressive left, grounding policy discussions in robust empirical data and a political economy perspective on how economic structures are actively shaped rather than passively accepted.