What Happened to Middle Class America: Economist Paul Krugman on Social Programs & Unions (2007)

Trade liberalization may shift economic inequality from a global to a domestic scale. When rich countries trade with poor countries, the low-skilled workers in the rich countries may see reduced wages as a result of the competition, while low-skilled workers in the poor countries may see increased wages. Trade economist Paul Krugman estimates that trade liberalisation has had a measurable effect on the rising inequality in the United States. He attributes this trend to increased trade with poor countries and the fragmentation of the means of production, resulting in low skilled jobs becoming more tradeable. However, he concedes that the effect of trade on inequality in America is minor when compared to other causes, such as technological innovation, a view shared by other experts. Lawrence Katz estimates that trade has only accounted for 5-15% of rising income inequality. Robert Lawrence argues that technological innovation and automation has meant that low-skilled jobs have been replaced by machine labor in wealthier nations, and that wealthier countries no longer have significant numbers of low-skilled manufacturing workers that could be affected by competition from poor countries.



Another cause is the rate at which income is taxed coupled with the progressivity of the tax system. A progressive tax is a tax by which the tax rate increases as the taxable base amount increases.[30][31][32][33][34] In a progressive tax system, the level of the top tax rate will have a direct impact on the level of inequality within a society, either increasing it or decreasing it, provided that income does not change as a result of the change in tax regime. Additionally, a steeper progressivity results in a more equal distribution of income across the board. The difference between the Gini index for an income distribution before taxation and the Gini index after taxation is an indicator for the effects of such taxation. Overall income tax rates in the United States are below the OECD average.[35]
There is debate between politicians and economists over the role of tax policy in mitigating or exacerbating wealth inequality. Economists such as Paul Krugman, Peter Orszag, and Emmanuel Saez have argued that tax policy in the post World War II era has indeed increased income inequality by enabling the wealthiest Americans far greater access to capital than lower-income ones.

Economic inequality (also described as the gap between rich and poor, income inequality, wealth disparity, or wealth and income differences) is the difference between individuals or populations in the distribution of their assets, wealth, or income. The term typically refers to inequality among individuals and groups within a society, but can also refer to inequality among countries. The issue of economic inequality involves equity, equality of outcome, equality of opportunity, and life expectancy.[1]
Opinions differ on the utility of inequality and its effects. A 2010 study considered it beneficial,[2] while other recent studies consider it a growing social problem.[3] While some inequality promotes investment, too much inequality is destructive.[4] Income inequality can hinder long term growth.[5][6][7] Statistical studies comparing inequality to year-over-year economic growth have been inconclusive;[8] however in 2011, researchers from the International Monetary Fund published that income equality was more determinate of the duration of countries' growth spells than free trade, low government corruption, foreign investment, or low foreign debt.[4]

Economic inequality varies between societies, historical periods, economic structures and systems (for example, capitalism or socialism), and between individuals' abilities to create wealth. The term can refer to cross sectional descriptions of the income or wealth at any particular period, and to the lifetime income and wealth over longer periods of time.[9] There are various numerical indices for measuring economic inequality. A prominent one is the Gini coefficient, but there are also many other methods.

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