"Piketty is certainly right to emphasize that there was nothing natural or inevitable about the income compression that occurred in the middle of the twentieth century. It was the product of global conflict and domestic political struggles. In Europe, two World Wars and the progressive tax policies that were needed to finance them did enormous damage to the old estates and great fortunes: many rich people, after paying their income and inheritance taxes, didn’t have enough money left to replenish their capital. During the postwar era, inflation ate away at their savings. Meanwhile, labor-friendly laws enabled workers to bargain for higher wages, which raised the proportion of income that labor received. And the task of rebuilding after the wartime destruction made for the rapid expansion of G.D.P. This helped to keep the growth rate above the rate of return on capital, fending off the forces of divergence.In the United States, the story was less dramatic but broadly similar. The Great Depression wiped out a lot of dynastic wealth, and it also led to a policy revolution. During the nineteen-thirties and forties, Piketty reminds us, Roosevelt raised the top rate of income tax to more than ninety per cent and the tax on large estates to more than seventy per cent. The federal government set minimum wages in many industries, and it encouraged the growth of trade unions. In the decades after the war, it spent heavily on infrastructure, such as interstate highways, which boosted G.D.P. growth. Fearful of spurring public outrage, firms kept the pay of their senior executives in check. Inequality started to rise again only when Margaret Thatcher and Ronald Reagan led a conservative counter-revolution that slashed tax rates on the rich, decimated the unions, and sought to restrain the growth of government expenditures. Politics and income distribution are two sides of the same coin."
I have heard of this book, not read it though. Maybe I will now though. I think it is all well and good to point out that economies do not exist in political and cultural vacuums (and, really, not many economists claim that they do), but the criticism cuts both ways. Policy is not made in an economic vacuum either. It is easy, and in some sense true, to point to changes in say labor and tax and policy and blame them for rising inequality. However, I think that a more important question is why were those policy changes implemented when they were, and why were they not effectively resisted by those who stood to loose out. I mean the conservative government of Edward Heath also tried to break the miners unions in Britain before Thatcher did, and they failed to do so. So what changed about the world that allowed these political changes to happen? I would not claim to answer the question entirely, but I think that technological change and changes in the price and capital structure (i.e. 'sterile' economic variables) are an important part of it.
Also, it is a bit of an incomplete picture of inequality to look only at the share of income going to the top X percent. It ignores the important role of inequality amongst the lower (100-X) percent. A society could easily have a relatively small share of income going to the top, say, one percent and a relatively equal income distribution down most of the income ladder, but still be a really unequal society if say, the bottom ten percent are living in abject poverty. The postwar era in America was a relatively more equal society in the sense that the middle class expanded pretty rapidly among the educated white population. However, large swathes of society (primary racial and ethnic minorities, to say nothing of the status of women) were largely left behind by this, and it does not seem quite right to call the postwar era more equal simply because a smaller share of national wealth went to the top one percent. Really, this is a problem that I have with a lot of the "one percent, ninety-nine percent" rhetoric that you hear alot of these days, even if I am broadly sympathetic to the goal of trying to reduce inequality. Admittedly, inequality is not the easiest thing in the world to measure, but Gini Coefficients will paint a more complete (if, still, subjective) picture of inequality.