Political polarization today is greater than it’s been in recent history—at least since the 1970s. To see that, one need only look at the current U.S. presidential election.
And whatever your political leanings, an overly divided country can hamper its progress, such as the ability to innovate or adapt to geopolitical risk.
Another trend that has emerged over the same period is the widening gap between the richest and poorest Americans. By some estimates, it’s the widest it’s ever been.
These two coinciding facts raise the tantalizing question: Did the rise of income inequality over the past three decades contribute to increased political polarization? Or is it the other way around? Or perhaps it’s just a coincidence that they both have climbed over the same 30-40 year period?
Chicken and the Egg?
Unfortunately, causality—and its direction—can be very difficult to show, although intuitively we can see how either one might affect the other.
For example, greater income inequality may generate more polarization because disparities in earnings affect our priorities. It’s been argued that as we make more or less money, the issues we care about most change, as do how we feel about those issues.
On the other hand, greater polarization can generate gridlock in government, making it more difficult to pass legislation. If, for example, there are pressing issues, then greater dispersion in attitudes might make agreement more difficult. Inaction could, in theory, curtail efforts aimed at addressing inequality.
While both are plausible, my view is that the former mechanism is more likely—greater income inequality is leading to more polarization—because earnings inequality is not a transitory relationship. Rather, big differences in earnings takes years to develop, and the bulk of income inequality is explained by longer-run factors. For causality to work the other way, contemporary polarized voting patterns would have to be affecting inequality, which seems unlikely.
Furthermore, recent research in political science has also pushed back on conventional theories that polarization hinders the passage of policy.
Understanding the direction of causality is important for policy. If income inequality is the cause, we should not expect political compromises until labor force participation and competitiveness rise—reducing inequality. If polarization is the cause, then we should not expect our economy to improve until we are able to compromise.
