The notion that the Democrats’ electoral troubles since the 1960s are mainly a function of southern whites turning Republican is quickly becoming conventional wisdom. Thomas Schaller offers a version of this story in his book Whistling Past Dixie. In an article titled “What’s the Matter with What’s the Matter with Kansas?“, Larry Bartels concludes that the entire Democrat-to-Republican shift in presidential voting among working-class whites occurred in the south. Paul Krugman embraces Bartels’ findings in The Conscience of a Liberal. Here’s how Krugman puts it:

“The overwhelming importance of the Southern switch suggests an almost embarrassingly simple story about the political success of movement conservatism. It goes like this: Thanks to their organization … movement conservatives were able to take over the Republican party, and move its policies sharply to the right. In most of the country this rightward shift alienated voters, who gradually moved toward the Democrats. But Republicans were nevertheless able to win presidential elections, and eventually gain control of Congress, because they were able to exploit the race issue to win political dominance of the South.” (p. 182)

This view of developments contains an important truth: Southern whites were heavily Democratic until the mid-sixties. Now they are less so, and today the south is the easily the most Republican region of the country.

Yet the notion that the defection of whites, especially working-class whites, from the Democrats has been largely confined to the south paints too simple a portrait. Since 1972 the General Social Survey has asked American adults about their “party identification,” along with a battery of other questions. People’s political preferences ultimately matter to the extent they influence actual voting choices. But analyzing presidential voting alone, as Bartels does, can miss part of the story. Presidential voting is heavily influenced by the particular candidates the two parties nominate. Arguably, people’s underlying preferences and beliefs are better understood by looking at their party identification. The following chart shows the share of working-class whites identifying as strong-Democrat, moderately-strong-Democrat, or independent-leaning-Democrat since the early 1970s.

The country is split here into three regions: the south, the midwest and plains states, and the east and west coasts. In the south, identification with the Democrats fell roughly 20 percentage points — from 60% to 40% — between the mid-1970s and the early 1990s and has held steady since then. This is consistent with the picture offered by Bartels and Krugman.

Yet the same thing happened in the other two regions — even on the coasts, where the most solidly “blue” states are located.

With several graduate students at the University of Arizona, I have been examining this development (“The Democrats and Working-Class Whites”). It turns out not to be a function of our measure of party identification or of the working class. Nor is it specific to men or to the most religious. And most of those who left the Democrats didn’t become “independents.” In fact, since the early 1990s approximately 40% of working-class whites have identified as Republican — the same as the share that identifies as Democrat.

What caused this development? We conclude that it was due in large part to the crisis of the late 1970s. The economy fell apart under a Democratic president and Democrat-controlled Congress, leading many in the working class to question whether the party was still the better of the two at securing their material well-being. Ronald Reagan offered a simple and seemingly plausible solution — less government — which also tapped into desire for tax relief. The Democrats’ economic woes were compounded by the twin foreign policy disasters of 1979 (the Soviet invasion of Afghanistan and the Iranian hostage crisis), rising crime, forced busing, and affirmative action.

The deep recession of the early 1980s brought a temporary halt to the white working-class defection. But as the economy recovered in the mid-to-late eighties, as Reagan’s actual policy shifts proved less radical than his rhetoric, and as the Soviet bloc crumbled beginning in 1989, the defection resumed.

As the chart above reveals, little has changed since the early 1990s. This is puzzling. After all, Republican presidents presided over the two most recent economic recessions (early 1990s and early 2000s), and far and away the healthiest economic period for workers in the past generation was the Clinton years of the late nineties. We find, consistent with Thomas Frank’s What’s the Matter with Kansas? argument, that this is due partly to heightened importance of social issues such as homosexuality and abortion to working-class whites. Another key factor is that the cohort of working-class whites who turned 20 since the mid-1970s, when the defection from the Democrats began, has always been less pro-Democrat. They have been gradually replacing the much more pro-Democrat cohort that came of age during the Roosevelt and Truman years.

This does not mean Democrats don’t, or won’t, win elections. They still get the votes of many working-class whites. And as John Judis and Ruy Teixeira ably document in The Emerging Democratic Majority, they now tend to win a sizable majority of the votes of urban professionals, as well as African Americans, Latinos, and women.

But regaining the consistent support of a majority of working-class whites would certainly help. Depending on the definition, this group constitutes roughly a third to half of the voting-age population.

The share of American households delinquent or in default on their mortgage payments has been increasing for several months. The Wall St. Journal reported yesterday that the same is true for auto loans. The New York Times reported last Friday that food bank use is on the rise.

The proximate cause of these developments is the housing crisis. But there is a longer-term element. We may be embarking on a period in which sour economic turns — an increase in unemployment, a rise in interest rates, a significant jump in gas or food prices — create substantial financial difficulty for a larger share of households than has previously been the case. Why? Because more households have little financial “wiggle room.”

The conventional story attributes this to Americans’ increasing recourse to debt. Household debt has indeed risen sharply in the past two and a half decades; debt as a share of disposable personal income jumped from 70% in the early 1980s to 130% in 2005, according to calculations by Lawrence Mishel, Jared Bernstein, and Sylvia Allegretto of the Economic Policy Institute. Part of this is credit card debt, but the bulk is mortgage debt — a product of rapidly-rising home prices, low interest rates, low-down-payment mortgages, and home equity loans.

The following chart shows the average ratio of debt payments to income for families in the bottom three quintiles of the income distribution. The data are from an analysis of the Survey of Consumer Finances by Federal Reserve economists Brian Bucks, Arthur Kennickell, and Kevin Moore. (The calculations are available beginning in 1989.) For each of these groups, which together comprise 60% of the population, average debt payments have increased. Yet they haven’t exactly skyrocketed.

Debt is by no means the whole story. Equally important are two other developments. First, except for a brief period in the late 1990s, inflation-adjusted earnings for people in the lower half of the distribution have been stagnant since the late 1970s. The next chart shows this.

Second, many two-adult households have offset wage stagnation by sending the second adult into the the labor force. But as Elizabeth Warren and Amelia Warren Tyagi point out in The Two-Income Trap, for a lot of households that option is no longer available. The next chart suggests why. Nearly three-quarters of prime-working-age (25 to 54) women are now employed, up from half in the early 1970s. Thus, many of the households that can have two employed adults already do.

The result? Households now appear to be more sensitive to serious short-run financial strains — job loss, a medical problem that results in significant cost (due to lack of health insurance or inadequate coverage), a hike in rent, a rise in mortgage payments (as a low-interest-rate adjustable mortgage rolls over). A generation ago a household could adjust to this type of event by having the second adult take a temporary job to provide extra income. During the economic boom of the late 1990s they might have been able to switch jobs in order to get a pay increase. In the past ten years they could run up credit card debt or take out a home equity loan.

For many households with moderate or low incomes, these strategies are now foreclosed.

“Tax cuts for the wealthiest benefit everyone.” “Though seemingly compassionate, generous government assistance for the poor is unwise.” These and a variety of related policy arguments rest on the notion that equality and economic growth are at odds. Are they?

That the economy would suffer if there were very little inequality is certainly true. To get inequality to a very low level, the government would have to impose high tax rates and redistribute much of the revenue to those who get paid little. Or it could mandate that everyone be paid approximately the same amount. Either option would drastically reduce many people’s motivation to work hard, learn new skills, save and invest, and start new businesses. The result would be a far less dynamic economy.

But most of those who believe inequality in the United States is too high would like less inequality, not no inequality. Hence, the real question is: Would the economy suffer if incomes were less unequal?

Evidence

To answer this question it helps to examine some evidence. We could, for example, look at the experiences of the United States and other similarly-affluent countries in recent decades. A number of studies have found that among poor and middle-income countries, less inequality tends to boost economic growth. But these countries are so different from richer nations in their economic and political institutions that it doesn’t make sense to try to generalize from one to the other.

The following chart includes the seventeen affluent nations for which comparable data are available for inequality and growth over a reasonably lengthy period of time. Income inequality in 1980 (or the closest available year) is on the horizontal axis. It is measured using the Gini index; larger values indicate more inequality. The average rate of economic growth from 1980 to 2005 is on the vertical axis. There is no association between inequality and growth.

What about Ireland? It began the 1980s as a high-inequality country, and it enjoyed by far the fastest economic growth among these nations over the ensuing two and a half decades. Like that of any individual nation, however, Ireland’s story is a complex one, and explanations of the Irish growth miracle seldom attribute any importance to its high level of income inequality.

Of course, the United States is unique in various ways. Perhaps what applies to rich countries in general doesn’t hold for the U.S. in particular. Another source of evidence is the experience of the American states. The next chart shows a similar lack of association across the states.

We also can examine the U.S. historical experience. There are good data on income inequality and economic growth going back to the late 1940s; before then data are less reliable, especially for inequality. Inequality decreased a little in the 1950s and 1960s, but has risen a good bit since then. The following chart shows the U.S. economic growth rate by income inequality for each year from 1947 to 2005. Economic growth is averaged over ten-year periods beginning in the year inequality is measured. (For the year 1990, for instance, inequality is measured during that year and economic growth is averaged over 1990 to 1999.) As with the cross-country and cross-state evidence, there is no indication here of a tradeoff between equality and growth.

(Data used in these charts are from the Luxembourg Income Study, OECD, Census Bureau, and Bureau of Economic Analysis.)

Objections

Is something missing from the picture conveyed by these data? How would a proponent of the notion that more equality means less growth respond?

First, she or he might point out that even Arthur Okun, a respected liberal economist and one-time chair of Lyndon Johnson’s Council of Economic Advisers, admitted that there is a tradeoff between equality and growth. Indeed he did. In his influential 1975 book, Equality and Efficiency: The Big Tradeoff, Okun wrote “Equality in the distribution of incomes … would be my ethical preference. Abstracting from the costs and consequences, I would prefer more equality of income to less and would like complete equality best of all.” But he reluctantly concluded that given the existence of a tradeoff between equality and growth, society ought to forgo greater equality in favor of a healthy economy.

However, Okun’s conclusion was based largely on theorizing rather than evidence. What does theory tell us about the effect of inequality on growth? Until recently the standard view was that there is a tradeoff. Less inequality will produce less investment, because the rich do most of the saving and investing. It also will produce less work effort, because those at the top of the income distribution lose more of their earnings to taxes and those at the bottom can live off government benefits instead of getting a job.

These days, however, it is widely recognized that theory is ambivalent about the impact of inequality on growth. Yes, higher taxes might reduce savings. But if the money is redistributed to the poor, consumption may increase, since the poor tend to spend a larger of their income. Consumption tends to be just as important for economic growth as savings. (High-spending America grew much more rapidly than high-saving Japan in the 1990s.) Yes, generous government benefits may reduce work effort by those at the bottom of the distribution. But generous benefits can have strings attached. In Denmark and Sweden, working-age adults can receive government benefits such as social assistance and unemployment insurance for only a limited period of time, after which they are expected (and helped) to find employment. Furthermore, a relatively egalitarian income distribution is likely to enhance perceptions of justice, potentially boosting work effort while reducing crime and other socially wasteful behavior. Bottom line: to understand inequality’s impact on growth, we have to rely on empirical evidence.

It also is worth noting that Okun wrote at a time, the early 1970s, when the level of income inequality in the United States had reached a historical low and the economy was mired in a recession. Had he been able to consider developments in the U.S. and other affluent countries in the ensuing decades, his assessment might well have been different.

A second line of response is that these charts must be hiding something. It is, of course, possible to mislead with statistical data (as with any other type of evidence). But what, exactly, might these charts be hiding? One possibility is that income inequality and/or economic growth is measured improperly or inaccurately. Another is that choosing a different starting or ending year might change the picture. A third is that taking into account (“controlling for”) other determinants of economic growth could lead to a different conclusion. In a recent book, Egalitarian Capitalism (Russell Sage Foundation, 2004), I considered these objections in some detail. None of them turns out to alter the picture conveyed in the charts here.

A third type of response is that while the level of inequality might not affect economic growth, government action to reduce the existing level, such as raising tax rates on the rich, will. Here the historical experience of the United States is again instructive. Although they aren’t perfect, the best available data suggest that income inequality fell sharply between 1930 and 1950. This was due mainly to higher tax rates, New Deal benefits such as social security and unemployment compensation, legalization of union bargaining rights, and wartime wage controls. In the forties, fifties, and sixties the economy boomed. After holding steady during the 1950s and 1960s, inequality has jumped sharply since the mid-1970s. There has been no upward shift in the rate of economic growth during this period.

Why Americans Are Confused

In 1987, 1996, and 2000 the General Social Survey asked American adults whether they agreed or disagreed with the statement “Large differences in income are necessary for America’s prosperity.” On the one hand, in each of these years only about 30% said they agreed or strongly agreed. On the other hand, fewer than half tended to disagree or strongly disagree. A relatively large share said “neither,” probably because they weren’t sure what to think.

This ambivalence, or confusion, offers a significant opportunity for those appealing to the notion of an equality-growth tradeoff. Claim that a tax cut for the well-to-do will boost economic growth and a sizable share of Americans won’t feel confident in objecting. The idea seems plausible, and social scientists and policy makers have not been effective at communicating the relevant empirical evidence.

In this instance the evidence speaks rather clearly. Is it likely that less income inequality here in the U.S. would result in less economic growth? No.